THE  BUSINESS  OF  FINANCE 


Books  By  the  Same  Author: 


.  INTERNATIONAL  FINANCE 
A  description  of  the  machinery  and  methods 
of  money-dealing  between  countries,   and 
how  Foreign  Loans  are  floated.. Net,   LJW 

THE  MEANING  OF  MONEY 
Explains     the     whole     mechanism     of     Bank- 
ing  Net,$L75 

THE  WAR  AND  LOMBARD  STREET 

An  explanation  of  the  effect  of  the  first  weeks 
of  the  war  on  the  London  and  other  inter- 
national markets Net,  $1.60 

STOCKS  AND  SHARES 

An  inside  view  of  the  European  Stock  Market 
with  every  operation  in  the  handling  of 
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'  POVERTY  AND  WASTE 

A  study  of  the  close  connection  between 
stringency  and  recklessness Net,  $1.50 

MONEY  CHANGING 
Deals  with  Foreign  Exchange  and  Credits, 

Net,  $1.75 

•  OUR  MONEY  AND  THE  STATE 
The   theory   of   Taxation    and    a    discussion    of 
loans  versus  taxes  for  war-revenues, 

Net,  $1.25 


E.  P.  DUTTON  &  COMPANY 


THE  BUSINESS 
OF    FINANCE 


BY 


HARTLEY  WITHERS 

Author  of  the  "Meaning  of  Money."  "Our  Money  and  the  State/ 
"International  Finance,"  etc 


NEW  YORK 

E.  P.  DUTTON  &  COMPANY 

681  Fifth  Avenue 


y\G. 


nK 


5 


Copyright,  1918,  by 
E.  P.  BUTTON  &  COMPANY 


All  Right*  Reserved 


Printed  In  the  United  States  of  Amertoa 


PREFACE 


This  Preface  is  written  to  the  accompaniment  of 
anti-aircraft  guns,  and  the  book  itself  was  produced 
among  the  many  distractions  that  war  brings  with 
it,  even  to  a  mouldy  old  civilian.  Finance  is  a  form 
of  human  activity  that  is  essentially  based  on  sted- 
fast  and  well-ordered  social  conditions,  and  its  work 
and  progress  are  thus  warped  with  especial  violence 
by  war  and  its  barbarisms.  Nevertheless  the  glare 
of  war  has  thrown  light  on  finance  and  brought  out 
its  strength  and  weaknesses  in  strong  relief.  When 
it  ends,  finance  will  need  all  its  strength  to  face  the 
great  problems  of  rebuilding.  The  object  of  this 
book  is  to  show  where  that  strength  lies  and  how  it 
can  best  be  used. 

Hartley  Withers. 


Hampstead,  February  16, 1918. 


387533 


Digitized  by  the  Internet  Arciiive 

in  2007  witii  funding  from 

IVIicrosoft  Corporation 


http://www.archive.org/details/businessoffinancOOwithrich 


CONTENTS 


CHAPTER  I 


INTRODUCTORY 


Progress  about  to  begin — ^The  effort  needed — ^The  position 
of  Finance — The  problem  to  be  dealt  with — ^The  work 
of  Finance — The  objects  and  ideals  to  be  aimed  at. 


CHAPTER  II 

THE  PROVISION  OF  CURRENCY 

Currency  and  Money — Precious  Metals — Bills  of  Ex- 
change— Bank  Notes — Government  Notes — Cheques — 
The  manufacture  of  the  Cheque  Currency — ^The 
"Quantity  Theory" — Responsibility  of  Bankers  for 
Inflation — The  Regulation  of  Currency  Issue — Sug- 
gested Demonetization  of  Gold 20 

CHAPTER  III 

CREDIT 

How  Provided — A  Bank  Balance  Sheet — Loans  and  Ad- 
rances — Bills  of  Exchange — Acceptance — ^Loans  to 
Stockbrokers — Investments  by  Banks — Credit  and 
Production — Regulation  of  Demand — The  Bankers* 
Besponsibility S5 


CHAPTER  IV 

CAPITAL 

Distinguished  from  Credit — How  Produced — Finance  and 
Capital — ^The  Public's  Delusions — Attacks  on  Capital — 
Embittered  by  bad  War  Finance — Capital's  Justifica- 
tion— Its  past  Misdeeds — Collective  control  of  Capital 
— ^Working   Men  Capitalists 70 

vii 


viii  CONTENTS 

CHAPTER  V 

COMPANY  CAPITAL 

TLe  Public  and  Its  Investments — The  Obscurities  of  a 
Balance  Sheet — The  Education  of  the  Public — ^Re- 
sponsibility of  Finance 93 

CHAPTER  VI 

THE  MANUFACTURE  AND  MARKETING  OF  SECURITIES 

Prospectuses — Freedom  and  Its  Drawbacks — The  Forms  of 
Securities — The  Market — ^The  Issue  of  Securities — 
GoTemment  Control — Is  Speculation  Wicked?    .    .    .115 

CHAPTER  VII 

INTERNATIONAL  CURRENCY 

Bills  of  Exchange — Based  on  Goods  and  Services  Exported 
— Visible  and  Invisible  Exports — Rates  of  Exchange — 
Finance  Bills — Gold  Movements — The  Gold  Exchange 
Standard — International  Bank  Notes? 133 

CHAPTER  VIII 

INVESTMENT  ABROAD 

Obstacles  after  the  War — Its  Effects — ^How  affected  by 
Manner  in  which  Present  War  ends — Its  past  Record — 
Its  Power  for  Good  and  Evil — DiflBculties  of  Safe- 
guarding— ^The  Unpopularity  of  the  Creditor  Country.  154 

CHAPTER  IX 

FINANCE  AND  GOVERNMENT 

Questions  of  Taxation^— Direct  V.  Indirect — Fiscal  Ideals — 
Inflation   and   Borrowing — Conclusion 176 


THE  BUSINESS  OF  FINANCE 


The  Business  of  Finance 


CHAPTER  I 

INTBODUCTOEY 

Mankind  is  now  suffering  from  a  raging  fever, 
due  to  an  ill  ordered  life  and  an  overheating  diet. 
It  knows  that  it  is  going  to  get  well  again  some  day 
and  in  the  lucid  intervals  of  its  malady  it  is  making 
up  its  mind  that  this  sort  of  thing  is  never  going  to 
happen  again.  The  bad  or  stupid  rulers  who  have 
brought  it  to  such  a  pass  are  going  to  be  requested 
to  retire  (this  process  has  begun  in  Russia,  but 
much  more  has  to  be  done  and  in  many  countries) ; 
the  world  is  going  to  be  governed  more  sensibly, 
and  with  a  clearer  view  of  the  appalling  disasters  to 
which  man  is  liable  owing  to  the  devilish  success 
with  which  he  has  perfected  the  means  of  destruc- 
tion, unless  his  tendency  to  mutual  destruction 
Is  exercised  and  chastened  into  brotherly  good- 
will. Moreover  the  revelation  of  man^s  power, 
which  his  ingenuity  in  destruction  has  given  us,  is 

1 


35  THE  BUSINESS  OF  FINANCE 

going  to  be  made  use  of,  when  once  this  fitful  fever 
is  overpast,  for  productive  and  constructive  achieve- 
ments such  as  have  never  yet  been  imagined.  Better 
still,  man  is  not  only  going  to  be  better  governed 
by  his  rulers  and  leaders.  He  is  going  to  learn  to 
govern  himself  better.  For  the  war  is  showing  us 
that  the  real  strength  of  a  nation  is  the  strength 
and  health  and  intelligence  and  sense  of  national 
duty  of  its  individual  citizens.  It  has  brought  home 
to  the  members  of  the  nations  in  it,  as  nothing  ever 
did  before,  that  every  man  and  woman  counts  and 
that  it  is  the  duty  of  each  one  to  be  as  well  fitted 
as  possible  in  mind  and  body  to  play  a  part  well  in 
life's  drama.  The  big  fellows  mouth  and  strut 
before  the  footlights,  but  it  is  the  crowd  at  the  back 
of  the  stage,  with  no  "speaking  part,"  that  produces 
the  real  effect.  In  short,  war  has  shown  us  how 
tremendous  is  man's  power  over  nature,  how  pro- 
digiously he  has  wasted  it,  what  miracles  he  can  ac- 
complish if  he  makes  good  use  of  it,  and  finally 
that  he  cannot  attempt  to  do  so  until  he  has  im- 
proved his  power  over  himself  and  learnt  to  keep 
himself  in  order. 

These  lessons  learnt,  there  will  be  a  great  stride 
forward  in  moral  and  material  progress.  Progress, 
in  fact,  may  be  said  to  be  just  about  to  begin,  when 
the  present  malady  and  the  subsequent  disorders 
of  convalescence — which  may  be  severe  and  long 
lived — ^have  been  overcome.  Perhaps  it  may  be  said 
that  the  beginning  has  already  been  made,  and  that 
it  dates  from  the  day  on  which  the  United  States, 


INTRODUCTORY  3 

by  intervening  on  the  side  of  Liberty,  recognised 
that  Progress  cannot  be  confined  to  one  nation,  but 
must  be  world-wide  if  it  is  to  go  forward  to  its 
full  triumph.  This  glorious  vista  of  possible 
achievement  that  we  can  see  dimly  through  the 
murk  of  war  will  only  be  reached  by  a  great  effort 
on  the  part  of  every  nation  and  of  every  citizen. 
Progress  does  not  happen  of  its  own  accord.  It 
has  to  be  worked  for,  or  fought  for,  every  day, 
every  day  by  everyone  who  wants  to  win  it.  Chasing 
rainbows  over  the  mountain  tops  is  glorious  fun 
for  those  who  like  it,  and  is,  indeed,  essential  to 
progress,  but  it  is  hard  work  on  the  practical  de- 
tails of  life  that  takes  things  forward;  and  in  the 
great  effort  that  has  to  be  made  every  worker  has 
to  consider  how  what  he  is  doing  fits  in  with  the 
great  enterprise  of  bettering  man's  lot,  whether  his 
work  is  furthering  it  or  hindering  it;  if  it  is  fur- 
thering, how  it  can  be  improved ;  if  it  is  hinder- 
ing, how  it  can  be  reformed  most  thoroughly  or 
buried  most  decently.  Every  form  of  man's  activ- 
ity has  to  be  overhauled  and  bettered,  and  those 
that  cannot  justify  themselves  are  likely  to  get 
short  shrift.  Kings  and  Parliaments,  Churches 
and  Schools,  philosophies  and  sciences,  employers 
and  employed,  producers,  middlemen,  oflficials,  con- 
sumers, writers  and  talkers,  all  are  being  tested 
by  the  stress  of  war  before  the  judgment  of  an  ex- 
ceedingly critical  public,  that,  sick  and  sore  with 
the  sufferings  that  this  cataclysm  has  brought  up- 
on it,  cannot  see  why  these  horrors  should  have 


4  THE  BUSINESS  OF  FINANCE 

happened  and  only  submits  to  them  in  the  hope 
that  they  will  never  happen  again. 

In  the  general  refurbishing  that  is  one  of  a  few 
things  that  one  can  expect  with  confidence,  Fi- 
nance wlil  come  in  for  its  full  share  of  question  and 
criticism.  Like  all  other  institutions  it  will  have 
to  justify  itself.  It  is  looked  on  with  suspicion  in 
the  first  place  because  its  mysteries  are  "caviare 
to  the  general"  as  Hamlet  says,  and  being  little 
understood  it  is  easily  misunderstood ;  but  also  and 
chiefly  because  people  are  known  to  make  a  great 
deal  of  money  out  of  it,  and  one  of  the  things  about 
which  public  opinion  is  now  strongly,  and  justly, 
convinced  is  a  belief  that  the  distribution  of  wealth 
may  and  must  be  improved,  and  that  superfluity 
and  glut  at  the  top  of  the  ladder,  with  destitution 
and  despair  at  the  bottom,  are  conditions  incom- 
patible with  true  civilization.  Finance  has  to 
justify  itself  as  a  beneficent  and  indispensable 
institution,  showing  that  it  earns  its  wages  and 
does  good  work  for  the  furtherance  of  economic 
progress,  work  that  could  not  be  done  otherwise, 
or  more  efficiently,  as  society  is  at  present  con- 
stituted. At  the  same  time.  Finance  has  to  con- 
sider the  joints  in  its  harness  and  take  earnest 
counsel  with  itself  concerning  improvements  in 
its  machinery.  That  it  will  do  these  things  I  have 
no  doubt.  But  everyone  who  works  in  its  great 
world-wide  factory  will  have  to  lend  a  hand,  taking 
a  wider  view  than  hitherto  of  his  responsibilities. 
Bankers,  financiers,  stockbrokers,  bill  discounters, 


INTRODUCTORY  5 

have  to  remember  that  earning  a  profit  for  them- 
selves or  for  stockholders  is  not  the  beginning  and 
end  of  their  business,  but  that  they  are  in  charge 
of  a  big  wheel  in  the  great  machinery  of  produc- 
tion and  distribution  of  wealth,  and  so  helping  the 
progress  of  mankind  to  a  better  state  of  mind  and 
body.  Finance  Ministers  and  tax  gatherers  have 
to  remember  that  balancing  this  year's  Budget,  and 
getting  revenue  in  with  least  possible  soreness  on 
the  part  of  the  tax-payers,  and  especially  of  their 
own  political  supporters,  is  less  important  than  the 
question  whether  their  measures  and  methods  are 
tending  to  increase  or  hinder  the  growth  of  their 
country's  wealth,  and  the  world's  output  of  goods. 
This  great  conflagration,  which  has  thrown  a 
fierce  light  on  so  many  things,  has  illumined  with 
its  glare  many  facts  about  finance  which  have 
hitherto  been  only  dimly  recognised.  It  has  put 
Finance  in  its  right  place  and  that  place  is  less 
important  than  many  people  thought.  It  is  not 
the  great  ruling  power  that  it  was  believed  to  be, 
but  is  merely  the  humble  handmaid  of  Industry. 
Finance  makes  and  handles  claims  to  wealth  and 
thereby  assists  in  its  production.  But  the  wealth 
— the  goods  and  stuff  that  man  produces  and  the 
services  that  he  renders  to  his  fellows — is  the  really 
important  thing  in  the  world's  economic  problem. 
Without  the  workers  who  make  the  stuff  and  render 
the  services  Finance  cannot,  by  the  most  ingenious 
jugglery,  add  one  cubit  to  its  stature.  It  is  equally 
true  that,  as  things  are,  Industry  could  not  do  a 


6  THE  BUSINESS  OF  FINANCE 

day's  work  without  Finance.  But  while  Industry 
is  essential  to  life,  Finance  is  a  piece  of  machinery 
which  can  be  replaced  if  mankind  decides  that  it 
might  be  improved  on.  We  all  remember  how  many 
people  thought  that  a  great  war  in  Europe  could 
hardly  last  many  months  because  it  would  cost  so 
much  that  it  would  not  be  possible  to  "find  the 
money."  Experience  has  shown  that  as  long  as  the 
stuff  necessary  for  war  can  be  turned  out,  the 
problem  of  finding  money  (of  a  sort)  is  easy,  be- 
cause G-overnments  with  or  without  the  help  of  the 
banking  machinery  can  manufacture  money  as  fast 
as  it  is  needed  and  induce  their  peoples  to  pass  it 
current  to  an  apparently  almost  unlimited  extent. 
In  fact,  as  will  be  shown  later,  one  of  the  results 
of  the  war  has  been  a  vast  increase  in  the  output 
of  money,  and  a  consequent  rise  in  prices,  because 
the  output  of  goods  did  not  keep  pace  with  it,  and 
one  of  the  problems  that  Finance  will  have  to  face 
very  seriously  is  the  effect  of  this  discovery  on  the 
minds  of  the  unreflecting  public,  which  is  apt  to 
think  that  multiplying  money  makes  it  richer,  and 
to  welcome  schemes  for  enriching  it  by  the  simple 
industry  of  the  printing  press. 

But  if  Finance  is  only  the  servant  of  Industry 
this  i3  a  position  that  puts  its  services  in  the  very 
front  rank  for  importance  in  the  great  move  for- 
ward that  is  coming.  If  mankind  is  to  be  made 
better  and  the  world  a  better  place  to  live  in,  one 
of  the  first  things  to  be  done  is  to  make  mankind 
better  off.    This  achievement  will  not  by  any  means 


INTRODUCTORY  7 

(solve  the  chief  problem,  because  if,  though  generally 
better  off,  we  continue  to  take  sordid  views  about 
wealth  as  an  end  in  itself  and  about  the  means  by 
which  it  is  fair  to  arrive  at  it,  then  nobody  will 
be  at  heart  more  comfortable,  and  the  economic  rela- 
tion of  man  with  man  will  continue  to  be  a  bar  to 
contentment  and  the  attainment  of  the  good  life. 
But  a  great  increase  in  material  goods  will  be,  at 
least,  a  help  towards  the  creation  of  a  better  world. 
To  the  lofty  philosophic  soul  the  possession,  or 
lack,  of  earthly  goods  is  an  irrelevant  detail  that 
has  no  effect  on  conduct.  But  most  of  us  ordinary 
folk  find  it  easier  to  be  honest  and  kindly  and  con- 
tented if  we  are  assured  of  a  fair  day's  wage  for 
a  fair  day's  work,  and  are  not  compelled  to  live  in 
chronic  anxiety  concerning  the  provision  of  our 
daily  bread.  When  the  burglar  has  burgled  enough 
to  secure  a  competence  he  is  apt  to  settle  down  into 
a  most  respectable  and  exemplary  citizen.  What 
we  have  to  do  is  make  an  honest  living  so  easy  to 
earn  that  man's  higher  faculties  may  have  a  better 
chance  of  being  developed.  As  long  as  most  of  the 
inhabitants  of  the  world  live  in  a  state  of  sordid 
insecurity  there  is  little  chance  of  getting  the  best 
out  of  them. 

On  the  economic  side  of  things,  then,  the  problem 
that  is  before  us  is  just  the  old  problem,  illuminated 
and  simplified  by  the  great  discoveries  that  have 
been  made  in  the  course  of  the  war.  That  old  prob- 
lem is  the  improvement  of  the  output,  transport 
and  distribution  of  goods.    War  has  taught  all  the 


8  THE  BUSINESS  OF  FINANCE 

warring  countries  that  they  had  a  great  store  of 
energy  available  for  production  that  had  hitherto 
gone  to  waste,  and  that  on  the  other  hand  many 
of  the  goods  and  services  that  used  to  be  considered 
as  essential  to  the  full  enjoyment  of  life  could  be 
foregone  without  any  real  sense  of  sacrifice — often, 
as  in  the  case  of  heavy  dinner  parties  and  other 
forms  of  fashionable  entertainment,  with  a  very 
real  sense  of  relief.    If  it  had  not  been  for  the  ever 
present  thought  of  the  awful  loss  of  life  among  the 
flower  of  the  world's  manhood  many  people  would 
have  found  life,  under  warfare's  austere  conditions, 
a  pleasanter  business  than  the  old  Vanity  Fair 
round.    At  least  this  was  so  during  the  first  two  or 
three  years  of  war,  before  the  long  strain  of  too 
much  work,  too  much  official  muddling  and  too 
much  waiting  for  good  news  had  begun  to  tell  on 
people's  nerves.    These  considerations  may  surely 
have  a  great  effect  both  on  production  and  con- 
sumption.    If  their  effect  lives,  it  will  mean  that 
much  more  goods  will  be  turned  out  and  that  pro- 
duction will  be  more  concentrated  on  things  that  are 
really  wanted.     There  will  be  fewer  gamekeepers 
and  more  food  growers,  fewer  flunkeys  and  more 
workers.    In  the  matter  of  transport  great  econo- 
mies and  improvements  have  been  effected  in  rail- 
way management,  and  the  submarine  has  taught 
shipowners  and  shipmasters,  and  all  who  handle 
traffic  at  ports,  lessons  in  efficiency  that  will  be  of 
lasting  value.    The  distribution  question — the  divi- 
sion of  the  product — is  one  that  bristles  with  diffi- 


INTRODUCTORY  d 

culties,  which  are  likely  to  be  great  and  iserious 
when  the  war  is  over,  and  may,  if  not  reasonably 
handled  by  all  parties  concerned,  produce  so  much 
friction,  and  worse,  that  all  the  great  opportunities 
for  the  improvement  of  man's  lot  that  are  now 
clearly  visible  may  be  lost,  or  made  useless  for 
generations.  But  at  least  the  war  has  shown  that 
only  by  harmonious  and  well  organised  work  can  the 
general  output  be  increased,  that  that  general  out- 
put is  the  source,  and  the  only  source,  from  which 
all  incomes  are  derived,  that  high  wages  and  high 
profits  can  go  together,  and  that  ill-paid  workers, 
working  long  hours  under  unwholesome  conditions, 
are  not  efficient  producers.  That  Labour  will  claim 
and  get  the  better  share  of  the  good  things  of  the 
earth  to  which  it  has  long  been  entitled  is,  I  think 
and  hope,  certain;  and  that  this  achievement  will 
tend  to  healthier  industry  and  a  steadier  demand 
for  staple  goods  and  more  wholesome  conditions  in 
the  whole  body  politic  is  an  equally  certain  conse- 
quence, if  Labour  uses  its  victory  wisely.  Con- 
centration on  the  problem  of  an  increase  in  the 
general  welfare,  combined  with  a  clearer  percep- 
tion of  the  fact  that  a  great  increase  in  the  world's 
output  of  goods  is  the  road  to  general  comfort  and 
content,  may  have  effects  that  will  astonish  hu- 
manity. 

This  picture  of  a  great  development  of  economic 
activity  and  prosperity  after  the  war  assumes,  of 
course,  that  the  end  of  the  war  will  be  such  that 
peace  on  earth  and  goodwill  between  men  will  be 


10  THE  BUSINESS  OF  FINANCE 

assured  if  not  for  all  time,  as  some  earnest  think- 
ers and  workers  are  trying  to  secure,  at  least  for 
some  time  to  come.  If  the  war  ends  with  a  peace 
based  on  hatred  and  vindictiveness  and  a  desire 
to  renew  the  struggle  as  soon  as  the  fighters  have 
recovered  from  exhaustion,  then  the  best  energy 
of  man  will  be  devoted  not  to  bettering  his  lot,  but 
to  training  the  world's  youth  to  the  arts  of  destruc- 
tion and  to  perfecting,  by  means  of  scientific  de- 
vices, the  horrible  engines  of  warfare  that  have 
made  the  present  struggle  so  appalling  and  so  dis- 
gusting. In  other  words,  man  will  devote  his  best 
energies  to  the  art  of  destroying  himself  and  all 
traces  of  such  civilization  as  the  ages  have  pro- 
duced. The  prospect  is  so  terrible  and  at  the  same 
time  so  ridiculous  that  it  would  seem  that  both 
fear  and  a  sense  of  humour  should  save  him  from 
such  a  fate.  If  not,  then  the  great  increase  in  out- 
put will  take  a  different  form  and  will  be  devoted 
to  a  multiplication  of  the  same  means  of  destruc- 
tion. 

In  any  case,  it  seems  clear  that  man,  with  his 
faculties  sharpened  and  his  perceptions  quickened 
by  a  struggle  that  has  made  nearly  all  members  of 
the  warring  nations  do  more  and  think  more,  is  go- 
ing to  be  very  busy,  and  will  need  in  an  increasing 
degree  the  help  of  the  machinery  of  finance,  pos- 
sibly modified  to  meet  new  circumstances  that  can- 
not at  present  be  foreseen.  The  chief  activities  of 
Finance  are  the  manufacture  and  provision  of  cur- 
rency and  credit,  the  handling  and  distribution  of 


INTRODUCTORY  11 

the  capital  that  is  saved  by  the  community  and 
put  into  the  equipment  of  industry,  and  the  collec- 
tion and  spending  of  the  revenue  of  the  nations 
and  the  raising  of  debts  for  any  purposes  that  they 
choose  to  pay  for  by  this  means.  The  work  of 
Finance  is  thus  divided  between  private  enterprise 
and  public  control.  The  provision  of  currency  is 
done  by  both  agencies,  the  Governments  minting 
the  coins,  while  notes  are  printed  by  State  or  semi- 
State  banks  (rarely  by  Governments),  or  by  joint 
stock  banks  under  more  or  less  public  control  and 
patronage ;  and  joint  stock  banks  provide,  as  a  gen- 
eral rule,  the  c'heques  which  are  the  most  commonly 
used  forms  of  currency  in  the  United  States  and 
Great  Britain,  the  two  countries  with  the  most  com- 
pletely developed  financial  organization.  The  hand- 
ling of  capital,  except  when  it  is  used  by  Govern- 
ments for  public  objects,  is  left  chiefly  in  the  hands 
of  private  enterprise,  and  is  managed  by  bankers, 
loan  issuers,  company  promoters,  bond-sellers  and 
stockbrokers.  The  raising  of  revenue  is  a  matter 
for  which  the  Government  is,  in  appearance,  solely 
responsible,  but  its  policy,  especially  in  democrat- 
ically governed  States,  is  largely  guided  by  public 
opinion.  International  payments  and  the  ma- 
chinery of  exchange  have  hitherto  been  largely,  al- 
most entirely,  in  the  hands  of  private  enterprise, 
but  war  has  made  many  Governments  take  a  new 
and  keen  interest  in  questions  of  exchange. 

It  is  possible  that  in  the  future  the  spheres  of  in- 
fluence of  public  control  and  private  enterprise  will 


12  THE  BUSINESS  OF  FINANCE 

be  varied,  and  that  the  encroachments  of  the  former 
on  the  boundaries  of  the  latter  that  have  taken 
place  during  the  war  may  be  preserved  for  some 
time  after  it,  if  not  for  all  time.  If  so  it  will  be  at 
first  sight  a  somewhat  disastrous  result  of  a  war 
waged  on  behalf  of  liberty,  that  thereby  the  free- 
dom and  elasticity  of  private  enterprise  should  be 
curtailed,  and  its  activities  taken  over  by  the  cum- 
brous and  slow  working  State  machinery.  But  it 
is  possible  that  this  may  be  only  a  superficial  view, 
and  that  if  the  State  can  do  certain  things,  hitherto 
done  by  private  enterprise,  more  cheaply  and  eflft- 
ciently,  the  cause  of  freedom,  in  the  widest  sense  of 
the  word,  may  be  actually  furthered  by  the  develop- 
ment of  State  control.  On  these  matters  and  many 
others,  we  have  to  try  to  rid  ourselves  of  all  preju- 
dice. It  is  certainly  true  that  a  man  controlled 
at  every  turn  by  the  State  can  never  grow  into  the 
fully  developed  being  that  can  only  be  produced  by 
freedom  and  personal  responsibility.  One  who  has 
never  sinned  because  he  has  never  been  given  the 
choice  or  chance  of  sinning  is  not  therefore  a  good 
man.  He  is  not  a  moral  agent,  but  a  machine.  But 
if  control  and  regulation  in  material  things  such 
as  Industry  and  Finance  have  the  effect  of  supply- 
ing our  material  needs  with  less  labour  and  so  leave 
us  free  for  the  development  of  our  higher  faculties, 
we  may  have  gained  a  higher  freedom  by  the  sacri- 
fice of  a  lower  one. 

But  so  far  there  is  much  to  be  said,  at  least  in 
England,   for  the  view  that  Government  control 


INTRODUCTORY  13 

though  necessitated  by  war  has  disgusted  the  pub- 
lic by  its  ineptitude.  One  of  the  reports  lately 
issued  on  the  question  of  Industrial  Unrest  in  Eng- 
land made  the  following  statement : 

"There  is  no  doubt  that  one  cause  of  labour  un- 
rest is  that  workmen  have  come  to  regard  the  prom- 
ises and  pledges  of  Parliament  and  Government 
Departments  with  suspicion  and  distrust." 

This  feeling  of  suspicion  and  distrust,  which  is 
by  no  means  confined  to  workmen,  has  certainly 
shaken  the  public's  belief  in  the  efficiency  of  its 
governing  mac^hinery.  On  the  other  hand  very  great 
achievements  have  undoubtedly  been  wrought  by 
this  same  machinery,  such  as  the  marvellous  devel- 
opment of  England's  output  of  munitions  and  the 
creation  of  a  great  Army  on  a  Continental  scale 
in  the  course  of  a  war  in  which  her  part,  as  a 
fighter  on  land,  had  been  expected  to  be  only  a  sub- 
ordinate service  to  the  cause  that  she  espoused.  It 
is  not  yet  possible  to  tell  whether  the  final  verdict 
at  the  end  of  the  war  will  confirm  or  reject  the 
view  that  a  development  of  Government  control  in 
Industry  and  Finance  is  desirable.  All  that  we 
can  be  sure  of  is  that,  however  man's  activities  are 
regulated.  Finance,  whether  in  private  or  public 
hands,  has  an  immensely  important  part  to  play  in 
a  period  of  growth  that  is  certain  to  be  of  ex- 
traordinary interest  and  may  be  one  of  quite  un- 
dreamt of  achievement, 


14  THE  BUSINESS  OF  FINANCE 

Finance  can  only  do  the  great  task  that  lies 
before  it,  if  it  not  only  keeps  its  own  machinery  in 
the  most  perfect  order,  with  a  view  to  providing 
Industry  with  facilities  on  the  soundest  lines  and 
at  the  lowest  possible  price,  but  if  it  also  looks  far 
beyond  this  obvious  duty  and  always  watches  care- 
fully to  see  that  the  effects  of  its  work  are  in  the 
best  interests  of  mankind.  The  whole  world  is 
going  to  make  a  great  effort  to  move  things  for- 
ward, and  every  worker  has  to  remember  always 
that  his  effort  has  to  help.  It  will  not  be  enough 
for  Finance  merely  to  make  a  profit  for  itself  and 
sell  credit  cheap  and  make  the  handling  of  capital 
quick  and  satisfactory.  It  has  to  use  all  its  great 
influence  to  secure  that  the  credit  that  it  creates 
and  the  capital  that  it  handles  are  used  for  the  right 
objects,  promoting  the  general  prosperity.  Only 
thus  can  the  best  interest  of  Industry  be  secured, 
and  the  interest  of  Finance  is  directly  bound  up 
with  that  of  Industry.  Every  time  the  effort  of 
Industry  is  misdirected  Finance  probably  suffers 
a  loss  and  is  certainly  discredited  in  the  public 
eye.  Every  time  the  promotion  of  Industry  is 
accompanied  by  social  evil,  the  ever  watchful  critics 
of  Finance  have  a  fresh  item  in  their  list  of  charges 
against  it. 

And  there  is  an  even  wider  responsibility  that 
financiers  like  everybody  else  will  have  to  consider 
if  the  effort  of  the  twentieth  century  is  to  have  any- 
thing more  than  a  merely  material  effect.  If  we 
suppose  that  the  most  skillful  and  efficient  use  is 


INTRODUCTORY  15 

made  of  the  revelation  that  has  lately  been  given 
of  man's  power  over  nature,  and  that  the  supply  of 
material  goods  is  increased  and  distributed  on  a 
scale  and  with  a  justice  and  success  that  have  never 
yet  been  thought  of  as  possible,  what  then?  What 
use  is  going  to  be  made  of  this  mighty  improve- 
ment? On  the  answer  to  this  question  the  fate  of 
real  civilization  hangs.  It  is  not  enough  that  we 
should  all  be  better  fed,  clothed  and  housed,  if  we 
make  use  of  the  greater  leisure  that  more  efficient 
production  secures  by  wallowing  still  deeper  in  a 
stream  of  more  freely  supplied  vulgarity.  Old  fash- 
ioned economists  have  been  justly  criticized  be- 
cause they  seem  to  have  thought  that  an  increase  in 
wealth  was  the  sole  object  to  be  secured,  and 
imagined  that  the  process  of  competition  would 
secure  that  this  wealth  would  be  equitably  shared 
and  well  used.  Experience  has  shown  that  this 
assumption  was  unsound  in  a  world  in  which  one 
of  the  parties  to  the  industrial  compact  was  in  a 
much  weaker  position  than  the  other,  and  the  pov- 
erty of  the  manual  workers  and  their  lack  of  educa- 
tion often  left  them  at  the  mercy  of  employers, 
who  on  the  other  hand  believed  that  they  were  act- 
ing in  the  interests  of  the  whole  community  by 
securing  their  labour  at  the  cheapest  possible  rate. 
This  error  has  now  been  left  behind  and  it  is  recog- 
nised that  ill-paid  labour  and  consequent  destitu- 
tion are  not  only  a  stain  on  the  civilization  that 
permits  them,  but  an  economic  evil  that  costs  every 
nation  dear  in  which  they  are  found.     It  is  now 


16  THE  BUSINESS  OF  FINANCE 

admitted  that  it  is  not  enough  for  a  nation  to  be 
rich  as  a  whole,  which  it  can  only  be  by  producing 
a  great  mass  of  goods  and  services,  but  that  its 
wealth  should  be  well  distributed,  and  that  the  goods 
and  services  should  be  devoted,  as  far  as  possible, 
to  increasing  the  welfare  of  the  whole  community. 
But  is  it  not  necessary  to  carry  this  development 
still  further  and  to  recognise  that  the  best  distrib- 
uted material  welfare  will  not  produce  a  fine  race 
unless  it  is  accompanied  by  a  growth  in  our  ideals 
and  an  improvement,  whidi  is  needed  in  all  classes, 
in  our  outlook  on  mental  welfare? 

When  we  consider  the  use  that  has  so  far  been 
made  of  the  great  discoveries  of  the  last  century 
we  see  that  there  is  very  great  danger  even  in  the 
better  future  that  is  now  seen  to  be  possible  that 
the  marvels  of  science  may  be  wasted  on  the  pur- 
poses of  vulgarity.  Improved  transport  cheapened 
food,  and  so  man  spent  more  on  fineries  and  futil- 
ities that  were  a  terrible  evidence  of  the  taste  of 
the  purchasers.  Cheap  paper  and  cheap  printing 
gave  us  a  Press  and  a  literature  which  did  little 
credit  to  our  discrimination ;  and  the  marvels  of 
photography  and  the  invention  of  the  cinemato- 
graph were  applied,  with  degrading  ingenuity  and 
success,  to  the  purposes  of  sickly  sentimentalism 
and  blatant  vulgarity.  Such  nauseating  exhibi- 
tions only  showed  how  little  mankind's  apprecia- 
tion of  w'hat  is  good  had  kept  pace  with  the  develop- 
ment of  his  mechanical  skill. 

If  the  world  is  now  to  be  made  better,  it  will  be 


INTRODUCTORY  17 

a  great  help,  as  has  been  shown,  to  begin  by  making 
it  better  off.  But  if  in  making  it  better  off  we  lose 
sight,  for  a  moment,  of  the  real  object  to  be  gained, 
we  shall  have  built  only  what  Plato  called  a  City 
of  Pigs.  In  working  for  material  ends  we  have  to 
keep  our  minds  ever  fixed  on  the  better  ideal,  of 
a  world  in  which  every  citizen  of  every  nation  is 
fully  supplied  with  all  material  needs  and  is  also 
fully  developed  in  mind,  intelligence  and  character 
— kindly,  courteous,  clever  and  unselfish,  and  with 
that  full  appreciation  of  all  sorts  of  beauty,  in 
action,  thought  and  perception,  in  which  real  civil- 
ization consists.  Hitherto  it  has  been  thought  pos- 
sible only  to  give  these  attributes  of  mind  to  a 
minority  of  each  community,  the  greater  number 
having  been  left  without  real  education  and  with- 
out leisure  enough  for  full  intellectual  develop- 
ment. In  Athens,  for  example,  a  minority  of  beings 
whose  mental  powers  must  have  been  on  a  higher 
level  than  those  of  any  society  that  has  existed 
since,  was  enabled  by  the  slave  labour  of  their 
dependents  to  lead  a  life  of  culture  and  refinement 
that  has  never  since  been  paralleled.  Now  it  is 
clear  that  if  the  right  effort  is  made  along  the 
right  lines,  the  use  of  machinery  and  improved 
industrial  organization  puts  such  a  life,  improved 
by  all  that  man  has  since  learnt  from  Rome's  prac- 
tical wisdom,  from  Christian  teaching  and  from 
the  works  of  great  artists,  writers  and  musicians, 
within  the  reach  of  the  greater  part  of  mankind. 
Will  this  effort  be  made?   If  one  were  to  judge  from 


18  THE  BUSINESS  OF  FINANCE 

the  attitude  of  the  average  Englishman,  especially 
of  those  classes  which  are  alleged  to  be  educated, 
towards  intellectual  matters,  there  would  seem  to 
be  little  chance  for  real  Progress.  But  perhaps  a 
new  spirit  may  arise  if  the  war  brings  the  right 
end,  in  the  shape  of  a  world  made  safe  for  democ- 
racy, and  an  all-embracing  League  of  Nation-s,  com- 
peting only  in  efiPort  for  the  improvement  of  all. 
We  may  seem  to  have  wandered  far  from  the  busi- 
ness and  duties  of  Finance,  but  it  is  not  so.  No 
one  can  work  well  unless  he  feels  that  he  is  working 
not  only  for  his  own  profit,  but  for  a  big  thing  to 
be  secured  by  his  work.  If  those  who  work  the 
machinery  of  Finance  see  what  a  mighty  big  thing 
might  be  made  of  this  world,  for  others  who  will 
be  born  after  them,  they  will  roll  up  their  sleeves 
to  their  job  with  a  very  different  spirit,  and  with 
very  different  results.  The  direction  that  human 
development  takes  depends  chiefly  on  what  the 
majority  of  hard-working  people,  in  charge  of  im- 
portant tasks,  think  is  worth  aiming  at.  Hitherto 
the  object  of  our  industrial  leaders  has  been  to 
produce  a  flood  of  cheap  stuff  and  force  it  down  the 
throat  of  an  uneducated  public  by  blatant  adver- 
tising. The  disgusting  results  of  this  degrading 
system  are  plainly  visible  in  the  sordid  ugliness  of 
our  civilization  which  has  defaced  a  world  that  is 
prodigal  in  natural  beauty.  Improved  public  taste 
with  an  improved  ideal  in  Industry  will,  by  slow 
degrees,  transform  the  whole  spirit  and  appear- 
ance of  things.    Working  both  for  Industry  and  for 


INTEODUCTORY  19 

the  public,  Finance  can  play  a  great  part  in  this 
transformation.  Mankind  is  still  but  a  flock  of 
sheep,  and  in  this  matter  of  the  use  that  it  makes  of 
its  money,  those  with  little  money  follow  with 
pathetic  stupidity  the  line  left  by  those  who  have 
much.  For  obvious  reasons  the  business  of  Finance 
is  largely  in  the  hands  of  men  of  wealth.  The  vul- 
garity of  wealth  has  far  less  excuse  and  far  more 
poisonous  results  than  that  of  the  poor,  and  there 
are  many  methods  besides  vulgarity  through  which 
wealth  is  habitually  misused.  If  all  who  handle  it 
and  use  it  would  recognise  what  might  be  made  of 
this  world  if  we  really  tried,  the  world  would  in  a 
few  generations  be  peopled  by  folk  as  different  from 
the  average  man  of  to-day  as  he  is  from  his  Simian 
ancestor.  It  is  certain  that  mankind^s  development 
will  be,  in  the  years  to  come,  rapid  beyond  all 
precedent.  Whether  it  will  go  upwards  or  down- 
wards will  depend  on  what  is  aimed  at  by  those 
who  count,  among  whom  are  those  who  work  the 
machine  of  Finance. 


CHAPTER  II 

THE  PROVISION  OF   CURRENCY 

Finance  being  the  machinery  by  which  money 
matters  are  handled  the  first  thing  to  be  consid- 
ered, when  we  come  to  practical  details  of  its  busi- 
ness, is  the  money  or  currency  that  it  creates.  It 
is  very  necessary  to  be  clear  in  our  minds  about 
the  meaning  of  the  terms  used  and  to  stick  to  this 
meaning.  I  regard  money  and  currency  as  iden- 
tical and  to  signify  any  article,  whether  made  of 
metal  or  Of  paper,  that  is  commonly  accepted  in 
payment  for  goods  and  services  in  economically 
civilized  countries.  It  should  be  noted  that  this 
use  of  the  word  differs  from  that  of  some  econo- 
mists who  restrict  the  word  "money,"  some  of  them 
to  actual  coins,  and  some  to  legal  tender,  that  is, 
those  articles,  whether  coin  or  notes,  which  the 
State  compels  sellers  and  creditors  to  take  in  pay- 
ment. I  venture  on  the  heterodoxy  of  a  wider 
meaning  to  the  word  because  I  think  it  is  more  in 
accordance  with  the  usages  of  ordinary  speech  and 
also  because  I  think  there  is  the  still  more  impor- 
tant reason  for  it,  namely,  that  the  essence  of 
money  is  its  power  to  be  exchanged  into  goods  and 

2Q 


THE  PEOVISION  OF  CURRENCY       21 

services,  and  that  this  power  is  just  as  effectively 
possessed  by  a  cheque  on  a  good  bank,  signed  by 
a  good  drawer,  as  by  any  gold  coin  or  gold  certifi 
cate.  It  should  also  be  noted  that,  in  the  jargon 
of  the  financial  world,  money  has  yet  another  mean- 
ing, namely,  a  short  loan.  "The  money  market" 
means  the  price  at  which  banks  will  lend  to  good 
customers,  and  the  price  of  money  in  this  sense 
is  the  rate  at  which  they  will  make  such  advances. 
Much  confusion  arises  in  the  minds  of  the  unin- 
structed  from  these  various  meanings  given  to  the 
word.  It  is  very  difficult  to  write  about  money 
without  using  it  in  different  senses  on  different 
pages,  or  even  on  the  same  page,  but  I  hope  through- 
out this  book  to  confine  it  to  the  use  that  I  have 
mentioned — namely,  anything  in  the  shape  of  coins 
or  paper  instruments  that  is  commonly  taken  in 
exchange  for  goods  or  services. 

Among  these  instruments  the  cheque,  which  I 
have  already  named  as  being  heretically  included 
by  me  in  tlie  term  "money,"  is  by  far  the  most 
important  in  the  volume  of  its  utility  and  in  its 
safety  and  perfection  as  an  instrument  of  payment. 
It  owes  its  being  to  the  ingenuity  of  the  financial 
machine  as  worked  by  private  enterprise  and  to 
the  confidence  of  the  business  community  in  the 
honest  and  sound  conduct  of  that  machine  so 
worked.  But,  as  it  is  only  taken  because  it  carries 
with  it  the  right  to  the  more  primitive  forms  of 
money,  it  is  better  to  consider  them  first,  so  fol- 
lowing the  course  of  currency  history. 


22  THE  BUSINESS  OF  FINANCE 

There  is  no  need  to  go  over  that  history  in  de- 
tail. Suffice  it  to  recall  that  mankind  began  by 
exchanging  goods  and  services  against  goods  ai.i 
services,  and  that  much  inconvenience  was  involved 
by  being  only  able  to  make  an  exchange  when  two 
parties  met,  each  of  whom  was  possessed  of  an 
article  which  the  other  one  wanted.  So  it  came 
about  that,  when  a  tailor  wanted  boots  but  could 
not  find  a  cobbler  who  wanted  clothes,  he  would, 
if  he  could,  take  payment  for  clothes  in  some  arti- 
cle which  the  cobbler  would  accept  in  exchange  for 
a  pair  of  boots.  This  process  led  to  the  adoption 
of  some  article  of  common  utility  (in  the  economic 
sense  of  the  word)  as  a  medium  of  exchange.  Util- 
ity in  the  economic  sense  does  not  necessarily  imply 
usefulness  in  the  housekeeping,  workaday  meaning 
of  the  word,  but  only  capacity  for  giving  satisfac- 
tion. It  is  a  fact  that  sometimes  makes  cynics 
chuckle,  that  the  article  of  commonest  utility  in 
this  sense  proved  to  be  the  precious  metals  with 
their  straight,  simple  appeal  to  human  vanity,  and 
the  "utility"  that  they  consequently  possessed  in 
decorating  the  person  of  the  owner,  winning  the 
favours  of  the  fair  and  propitiating  primitive  dei- 
ties through  the  adornment  of  their  temples  and  of 
their  priests. 

Perhaps  it  was  just  as  well  that  man  should  have 
insisted  on  prettiness  as  the  most  essential  point 
in  the  article  that  he  was  prepared  to  take,  in  the 
certainty  of  being  able  to  pass  it  on  when  he  wanted 
other  goods  or  services.    The  amount  of  labour  that 


THE  PROVISION  OF  CURRENCY        23 

he  has  sunk  throughout  the  ages  in  digging  for  the 
precious  metals  may  some  day  astonish  his  more 
rational  descendants,  but  it  would  have  been  even 
worse  if  some  really  useful  article  had  been  de- 
voted to  the  purposes  of  a  medium  of  exchange. 
Of  the  other  advantages  of  the  precious  metals  for 
this  purpose — their  ductility,  durability  and  so 
forth — the  text  books  on  the  subject  have  told  at 
length.  What  we  are  concerned  with  is  the  fact 
that  anyone  who  had  a  lump  of  gold  or  silver  could, 
owing  to  the  universal  readiness  to  accept  them, 
rely  on  being  able  to  turn  them  into  anything  that 
he  wanted  within  the  limit  of  their  buying  power; 
and  that  this  attribute  clung  to  them  throughout  the 
ages  as  use  and  wont,  and  the  power  of  convention 
and  habit,  confirmed  it,  until  now  a  heap  of  gold, 
silver  having  taken  a  subsidiary  position,  is  the 
essential  basis  of  the  most  highly  civilised  banking 
system,  and  the  paper  money  that  is  most  favoured 
is  that  which  is  most  readily  and  most  certainly 
turned  into  gold  on  demand,  if  its  holder  so  desires. 

Gold  still  has  value  as  a  commodity  for  orna- 
mental purposes  and  for  use  in  dentistry,  etc.,  but 
the  demand  for  it  for  use  as  currency  and  as  part 
of  the  basis  of  credit  currency  gives  it  a  place  by 
itself  among  commodities. 

Owing  to  the  inconvenience  involved  by  having 
to  weigh  and  test  the  metals  whenever  a  purchase 
was  made,  the  device  was  hit  on  of  cutting  them 
up  into  pieces  of  a  definite  weight  and  fineness,  and 
so  the  art  of  coinage  still  further  facilitated  the 


24  THE  BUSINESS  OF  FINANCE 

transactions  of  trade.  It  gradually  became  part 
of  the  business  of  Government  to  provide  the  citi- 
zens with  stamped  currency,  the  stamp  being  at 
once  an  official  guarantee  of  genuineness  and  a 
protection  against  those  who  might  make  a  living 
by  scraping  coins  and  then  passing  them  on.  But 
in  the  meantime  private  enterprise  was  already  busy 
with  the  problem  of  providing  commerce,  especially 
commerce  between  nations,  with  some  handier  sys- 
tem of  payment  than  the  passing  of  heavy  lumps 
of  metal,  coined  or  in  bars,  and  it  is  clear  from 
a  passage  in  a  letter  from  Cicero*  that  some  sys- 
tem of  making  oversea  payments  by  something  like 
the  modern  machinery  of  foreign  exchange  had 
been  developed  before  the  Christian  era,  and  the 
word  used,  permutariy  was  the  Latin  counterpart 
of  the  modern  phrase.  By  1470  the  use  of  bills  of 
exchange  was  common  enough  to  be  thundered 
against  as  a  form  of  usury  by  Richard  Porder,  in 
a  Whitsun  Monday  sermon  at  St.  PauPs.  "When," 
he  said,  "money  is  delivered  by  exchange  betwixt 
place  and  place  as  from  London  to  Hamborough, 
etc.,  to  bee  payde  two,  three  or  fower  monthes  after 
the  deliverie  thereof,  and  in  respect  of  that  time 
contracted  and  given  any  greater  or  more  price 
upon  the  pound  or  hundreth  pounds,  than  the  price 
is  at  sight  by  the  market,  and  more  than  the  de- 
liverer would  have  taken  to  have  had  payment  with 
all  possible  speeds  at  sight  (as  they  call  it)  that 
overplus  or  greater  price  taken  for  ye  times  for- 


*  Cic.  ad  Att.  12,  24. 


THE  PKOVISION  OF  CURRENCY        25 

bearance  is  usurie  forbidden,  and  that  deliverer  is 
an  usurer.''* 

It  is  not  clear  that  the  preacher  quite  understood 
the  system  that  he  was  denouncing,  but  it  is  plain 
enough  that  the  object  of  his  invective  was  the  sys- 
tem of  payment  for  goods  between  London  and 
Hamburg  by  means  of  bills  of  exchange  payable 
two,  three  or  four  months  after  sight,  a  higher  price 
being  exacted  in  consideration  of  the  time  allowed 
to  the  buyer  of  the  goods  before  he  had  to  meet 
the  bill.  And  so  it  is  evident  that  the  bill  of  ex- 
change, of  which,  as  will  be  shown,  the  cheque  is  a 
variation,  was  a  much  earlier  means  of  payment 
than  the  bank  note.  It  is  an  instrument  of  credit 
rather  than  a  form  of  currency,  in  the  sense  in 
which  I  am  using  the  word,  and  so  its  functions 
fall  within  the  next  chapter,  but,  as  it  had  to  be 
mentioned  here  as  a  matter  of  history,  it  is  better 
to  clear  it  up  by  giving  its  exact  legal  meaning — 
"an  unconditional  order  in  writing  addressed  by 
one' person  to  another,  signed  by  the  person  giving 
it,  requiring  the  person  to  whom  it  is  addressed 
to  pay  on  demand,  or  at  a  fixed  or  determined 
future  time,  a  certain  sum  of  money  to,  or  to  the 
order  of,  a  specified  person  or  to  bearer." 

Since  very  large  commercial  transactions,  espe- 
cially in  international  trade,  are  settled  every  day 
in  normal  times  by  means  of  bills  of  exchange, 
it  would  seem  at  first  sight  that  they  ought  to  be 


*  Quoted    by   Ellis    Powell,    The   Evolution   of   the    Money 
Markety  p.  25. 


26  THE  BUSINESS  OF  FINANCE 

included  as  currency.  But  they  do  not  pass  cur- 
rent in  the  hands  of  the  general  public.  They  are 
a  highly  specialised  means  of  payment,  handled 
chiefly  by  merchants  and  financiers,  and  so  their 
volume  does  not  directly  affect  the  price  of  the 
retail  goods  on  and  by  which  the  average  human 
being  lives.  Many  people  spending  large  incomes 
go  through  their  lives  without  seeing  or  hearing 
of  a  bill  of  exchange. 

Some  centuries  after  the  invention  of  the  bill 
of  exchange  the  supply  of  credit  instruments  was 
increased  by  the  discovery  of  the  bank  note,  which 
is  still  a  form  of  currency  in  the  sense  in  which 
I  am  using  the  word.  It  is  supposed  to  have  arisen 
from  a  practice  which  grew  up  by  which  people 
left  their  coined  currency  for  safe  custody  in  the 
hands  of  the  goldsmiths.  The  goldsmiths,  as  their 
stock  in  trade  was  of  high  value,  naturally  would 
have  special  arrangements  for  its  safe  custody,  and 
consequently  their  customers  were  encouraged  to 
leave  their  money  in  their  hands  in  the  expectation 
that  it  would  be  safer  from  theft.  The  next  step 
in  the  process  was  that  people  who  had  deposited 
coin  with  the  goldsmiths  would,  when  they  had  to 
make  a  payment,  instead  of  taking  the  coin  out  in 
order  to  make  it,  give  their  creditor  an  order  on 
the  goldsmith  for  the  amount  in  question.  These 
orders  on  the  goldsmiths  passed  from  hand  to  hand 
as  currency  and  so  fulfilled  the  purposes  of  coin. 
It*  must  then  have  occurred  to  some  unknown  but 
epoch-making  goldsmith  that  there  was  money  to 


THE  PROVISION  OF  CURRENCY        27 

be  made  and  business  to  be  done  by  supplying,  to 
customers  who  came  to  them  to  bori^ow,  not  actual 
coin,  but  an  order  on  themselves  to  pay  coin.  The 
goldsmith  would  trust  that  these  orders  would  go 
into  circulation  and  be  out  some  time  before  they 
came  in  for  payment;  and  from  this  time  to  the 
development  of  the  modern  note-issuing  banker  is  a 
very  short  step. 

The  bank  note  is  simply  a  promise  to  pay  on  be- 
half of  the  banker.  When  customers,  at  the  note- 
issuing  stage  of  banking,  came  to  the  bankers  for 
monetary  accommodation,  they  received  from  them, 
not  coin,  but  a  promise  to  pay  coin.  The  banker 
lent  money  to  the  customer,  and  the  customer,  by 
taking  the  banker^s  promise  to  pay,  at  the  same 
time,  in  effect,  lent  money  to  the  banker,  and  so 
this  curious  system  of  currency  arose,  based  on 
mutual  indebtedness  between  two  parties.  As 
long  as  the  loan  was  outstanding  the  banker  re- 
ceived interest  from  his  client  for  the  advance,  and 
at  the  same  time,  since  the  client  received  a  form 
of  currency  which  was  accepted  in  payment  by  the 
rest  of  the  community,  he  was  able  to  go  into  the 
market  for  commodities  and  provide  himself  with 
any  merchandise  that  he  wanted  for  business  en- 
terprise, or  for  materials  for  building  a  ship,  or  any 
other  industrial  business  that  he  had  on  hand. 

It  was  obvious  that  such  a  simple  means  of 
making  money  by  signing  promises  to  pay  was  cer- 
tain to  lead  those  who  practised  it  into  tempta- 
tion to  practise  it  too  freely,  and  the  early  days 


28  THE  BUSINESS  OF  FINANCE 

of  banking  are  a  melancholy  story  of  the  ill  effects 
of  the  over-issue  of  notes  by  bankers  who  forgot 
that,  in  order  to  keep  themselves  and  their  custom- 
ers safe,  it  was  necessary  to  have  a  stock  of  coin 
always  in  hand  to  meet  notes  that  might  be  pre- 
sented. The  disasters  that  followed  from  the  con- 
sequent over-issue  of  notes  have  been  the  theme 
of  many  romances  and  have  also  been  the  cause 
of  much  distress  and  disorder.  And  it  is  well 
known  to  everybody  that  the  issue  of  notes  by  bank- 
ers was  strictly  regulated  in  England  by  Peel's 
Act  of  1844.  Since  that  date  the  Bank  of  England 
note  has  been  practically  a  bullion  certificate  with 
a  strict  line  drawn  by  the  law  for  the  amount  of 
its  fiduciary  circulation,  that  is  to  say  the  amount 
of  notes  the  Bank  of  England  is  empowered  to  issue 
with  Government  securities  as  backing.  Over  and 
above  that  line  every  £5  note  has  to  have  £5  in 
coin  or  gold  bars  behind  it.  The  Bank  Act  did 
permit  the  Bank  of  England  to  hold  one-fifth  of 
the  bullion  held  against  its  notes  in  silver,  but 
this  permission  has  never  been  put  into  practical 
effect,  though  the  item  "Silver  Bullion,"  with  a 
blank  against  it,  is  still  to  be  seen  in  the  weekly 
accounts  issued  by  the  Bank  of  England's  Issue 
Department. 

At  the  same  time  the  note  issues  of  the  private 
and  joint  stock  bankers  of  England  were  strictly 
regulated  and  their  amount  is  now  negligible  in 
the  total  mass  of  the  British  currency. 

Bank  of  England  notes  are  very  seldom  seen  in 


THE  PROVISION  OF  CURRENCY        29 

actual  circulation.  Thej  are  largely  held  by  the 
other  banks  as  a  reserve  against  sudden  calls  upon 
the  currency.  They  are  used  occasionally  in  trans- 
actions such  as  a  transfer  of  real  property  in  which 
legal  tender  currency  is  demanded,  and  they  are 
fairly  frequently  to  be  seen  on  racecourses  when 
bookmakers  are  settling  with  their  clients. 

Notes,  or  promises  to  pay,  are  also  issued  by 
Governments,  chiefly  by  those  of  economically  back- 
ward countries,  but  in  America  the  Civil  War  pro- 
duced the  greenback,  and  there  are  also  gold  and 
silver  certificates  issued  against  the  deposit  of  these 
metals.  In  England  the  present  war  has  produced 
a  Treasury  note  for  £1  and  10s.  This  happened 
at  the  beginning  of  the  war  when  a  severe  banking 
crisis  caused  the  public  to  hoard  sovereigns  and 
the  banks  to  do  likewise.  The  banks,  when  asked 
for  money  by  their  depositors,  exercised  their  per- 
fect legal  right  of  paying  them  in  Bank  of  England 
notes,  and  so  the  public  found  itself,  in  order  to  get 
small  change,  obliged  to  go  on  to  the  Bank  of  Eng- 
land and  cash  these  notes.  It  was  evident  that  a 
form  of  paper  currency  of  a  smaller  denomination 
than  £5  was  required.  Why  the  issue  was  made 
by  the  Government  and  not  by  the  Bank  of  England 
we  shall  perhaps  know  some  day  when  the  war  is 
over.  At  present  all  that  can  be  said  is  that  for 
the  Government  to  act  as  an  issuer  of  paper  prom- 
ises to  pay  is  a  quite  new  departure  for  England, 
and  it  is  one  which  needs  very  careful  watching, 
as  it  is  already  producing  a  crop  of  suggestions 


30  THE  BUSINESS  OF  FINANCE 

that  anything  that  the  Government  needs  it  can 
easily  get  by  printing  notes  in  payment  for  it.  It 
is  understood  that  these  Treasury  notes  are  not 
actually  issued  at  present  by  the  Government  in 
payment  for  goods  that  it  buys  or  for  services  ren- 
dered to  it.  They  are,  in  fact,  handed  over  to  the 
banks,  which  pay  for  them  by  a  draft  on  their  bal- 
ance at  the  Bank  of  England,  at  which  the  chief 
English  banks  all  keep  an  account.  Nevertheless, 
the  final  result  is  exactly  the  same  as  if  the  Gov- 
ernment were  to  pay  the  notes  out  in  payment  for 
the  purchases  and,  as  we  shall  see  later,  the  crea- 
tion of  currency  in  this  manner  has  serious  draw- 
backs attached  to  it. 

Finally,  we  come  to  the  cheque,  which  is  now 
the  most  important  instrument  of  currency  in  eco- 
nomically civilised  countries. 

Cheques  were  already  in  common  use  at  the  be- 
ginning of  the  nineteenth  century,  and  it  is  very 
curious  that,  when  the  legislature  took  meticulous 
pains  to  regulate  the  note  issue  of  Great  Britain, 
it  should  not  have  observed  that  it  was  devoting  all 
this  trouble  to  regulating  a  form  of  currency  which 
was  already  threatened  by  the  appearance  of  a 
much  more  convenient  and  elastic  rival.  In  fact, 
more  than  ten  years  before  the  passing  of  Peel's 
Act  for  the  regulation  of  the  note  issue,  it  had  been 
discovered  by  far-seeing  people  in  the  City  of  Lon- 
don that  the  note  issue,  which  had  hitherto  been 
regarded  as  the  corner  stone  of  the  banking  edi- 
fice, was  a  comparatively  unimportant  ornament 


THE  PROVISION  OF  CURRENCY        31 

of  the  building.  This  discovery  had  been  put  into 
very  practical  effect.  As  is  well  known,  the  Bank 
of  England  had  been  given  what  was  understood 
to  be  a  monopoly  of  joint  stock  banking  in  London 
by  the  provision  that  no  society  or  partnership 
consisting  of  more  than  six  persons  should  be  em- 
piowered  to  issue  notes  in,  or  within  65  miles  of 
London.  It  was  believed  that  by  this  enactment 
banking  in  London  would  be  reserved  for  the  Bank 
of  England  and  the  private  banks,  owned  by  a  small 
number  of  partners,  and  that  joint  stock  banking 
could  not  raise  its  head  in  the  presence  of  this 
monopoly.  But,  when  it  was  seen  that  a  note  issue 
was  not  essential,  and  that  the  cheque  was  a  much 
more  useful  and  satisfactory  machinery  of  banking, 
this  monopoly  was  broken,  and  in  1834*  the  open- 
ing as  a  joint-stock  bank  of  the  London  &  West- 
minster Bank  initiated  a  movement  which  has  cov- 
ered England  with  the  branches  of  these  and  other 
important  joint  stock  banks,  having  a  head  office 
in  London  and  so  enjoying  no  right  of  note  issue 
but,  nevertheless,  doing  a  banking  business  on  a 
scale  which  has  in  some  cases  dwarfed  the  figures 
of  the  great  central  bank  round  which  they  have 
grown,  on  which  they  lean  and  of  which  they  are 
a  strong  support. 

The  legal  definition  of  a  cheque  is  "a  bill  of  ex- 
change, drawn  on  a  bank  and  payable  on  demand." 
The  advantages  of  the  cheque  are  many.     It  can 


*  Ellis  Powell,  Evolution  of  the  Money  Market^  p.  304. 


32  THE  BUSINESS  OF  FINANCE 

be  drawn  to  the  exact  amonnt  required.  If  drawn 
to  "Order"  it  makes  the  endorsement  of  the  payee 
necessary  before  its  payment  and  consequently  acts 
also  as  a  receipt  and  a  record  of  its  payment.  If 
crossed  by  the  drawing  of  two  lines  across  the  front 
of  it,  it  can  only  be  collected  through  the  bank  of 
which  the  recipient  is  a  customer;  and  if  marked 
"Not  negotiable,"  it  throws  upon  the  bank  that  pays 
it  the  onus  of  seeing  that  the  title  of  the  party  to 
whom  payment  is  made  is  good.  By  these  protec- 
tions it  is  a  far  safer  instrument  to  use  than  a  Bank 
of  England  note,  since  any  thief  who  gets  hold  of 
the  latter  can  turn  it  into  goods  in  the  ordinary 
course  of  business,  so  that  the  necessity  for  ensuring 
the  safe  delivery  of  a  cheque  is  very  much  less  than 
in  the  case  of  a  bank  note. 

From  the  nature  of  the  case  it  was  impossible 
that  the  cheque  should  be  made  legal  tender  cur- 
rency, that  is  to  say  that  anyone  to  whom  a  debt 
was  due  could  be  forced  to  accept  a  cheque  in  pay- 
ment. Legal  tender  in  England  is  confined  to  Bank 
of  England  notes,  Treasury  notes,  sovereigns  and 
half-sovereigns  up  to  any  amount,  silver  up  to  £2, 
and  copper  up  to  1/-.  A  cheque  obviously  could  not 
be  made  legal  tender  because  that  would,  in  effect, 
have  amounted  to  a  guarantee  by  the  Government 
that  every  cheque  drawn  would  be  good.  Anyone 
who  accepts  a  cheque  in  payment  does  so  with  the 
risk  before  him  that  the  man  who  has  drawn  the 
cheque  may  not  have  an  account  at  the  bank  at  all, 
or  may  have  overdrawn  it  if  he  has,  and  that  the 


THE  PEOVISION  OF  CURRENCY        33 

cheque  may  be  returned  from  the  holder's  bank  with 
indications  marked  upon  it  that  it  is  a  worthless 
piece  of  paper.  There  is  also  the  possibility,  hap- 
pily remote  in  these  times,  that  by  the  time  the 
cheque  is  presented  for  collection  the  bank  upon 
which  it  is  drawn  may  have  failed.  It  is  for  these 
reasons  that  the  cheque  currency  has  been  often 
left  out  from  the  definition  of  money  put  forward 
by  economists.  Nevertheless,  it  seems  to  me  right 
to  include  it  since,  as  a  matter  of  actual  practice, 
the  great  volume  of  commercial  transactions  is  day 
by  day  settled  by  means  of  cheques,  and  they  ac- 
cordingly fit  in  with  the  wider  definition  of  money 
that  has  been  adopted  for  the  purposes  of  this  book. 

Such,  then,  are  the  forms  of  money  that  are  now 
used  by  economically  civilised  communities;  bank 
notes.  Government  notes,  cheques  and  coin. 

In  England,  before  the  war,  retail  transactions, 
although  even  they  were  to  a  great  extent  settled 
by  cheque,  were  still  frequently  paid  in  gold,  and 
it  was  the  custom  of  the  average  well-to-do  citizen 
to  carry  several  sovereigns  and  half-sovereigns  in 
his  pocket  at  all  times.  Since  the  war  the  place  of 
these  gold  coins  that  used  to  circulate  has  been 
taken  chiefly  by  Treasury  notes  and,  to  some  ex- 
tent, by  a  larger  volume  of  silver  total  currency 
that  has  been  minted.  A  very  large  number  of 
sovereigns  used  also  to  be  held  in  the  vaults  of  the 
banks,  to  be  used  in  case  of  a  sudden  demand  for 
currency  by  their  customers.  Whether,  when  the 
war  is  over,  we  shall  return  to  the  use  of  gold  in 


34  THE  BUSINESS  OF  FINANCE 

circulation  remains  to  be  seen.  It  was  often 
argued,  in  times  before  the  war,  that  it  was  an 
extremely  wasteful  form  of  currency  and  that  it 
would  be  better  to  circulate  paper  with  a  gold  back- 
ing held  by  the  Bank  of  England.  The  contrary 
argument,  that  the  volume  of  gold  in  the  pockets 
of  the  people  was  a  reserve  that  would  be  very 
timely  and  useful  if  ever  war  or  crisis  arose,  has 
been  shown  to  be  very  true,  and  many  monetary 
experts  are  of  opinion  that  it  is  very  desirable  that 
this  pocket-money  reserve  should  be  built  up  again 
when  the  war   is  over. 

Of  these  various  forms  of  currency  it  will  be  seen 
that  one,  the  Treasury  note,  is  manufactured  di- 
rectly by  the  Government;  that  the  bank  note  is 
manufactured  by  the  banker  under  strict  Govern- 
ment regulation;  that  gold  coins  are  minted  and 
stamped  by  the  Government  as  the  gold  bars  are 
brought  to  the  Bank  of  England  and  to  the  Mint 
to  be  coined;  and  that  the  cheque  alone  is  manu- 
factured by  the  bankers  without  any  limit  or  re- 
striction by  law  or  Government  regulation.  By 
this  interesting  development  the  manufacture  of 
currency,  which  for  centuries  has  been  in  the  hands 
of  Government,  has  now  passed,  in  regard  to 
a  very  important  part  of  it,  into  the  hands  of 
companies,  working  for  the  convenience  of 
their  customers  and  the  profits  of  their  share- 
holders. 

It  should  be  noted  that  in  America  this  manu- 
facture of  currency  by  the  banks  is  subject  to  Gov- 


THE  PROVISION  OF  CURRENCY        35 

eminent  regulation,  since  the  Government  imposes 
a  legal  limit  upon  the  proportion  of  cash  (that 
is  to  say,  of  specie  and  legal  tender),  and  the  de- 
posits which  the  banks  are  liable  to  meet.  The 
effect  of  this  strict  regulation  has  in  the  past  been 
very  far  from  happy  since  the  result  of  it  was  that 
the  cash  reserves  held  by  the  American  banks  were 
useless  in  time  of  crisis.  In  England  it  has  always 
been  a  maxim  among  bankers  that  the  way  to  meet 
a  run  upon  them  is  to  pay  out  their  cash  with  the 
utmost  appearance  of  willingness  and  readiness. 
By  this  means  the  confidence  of  the  public  is  re- 
stored and  a  run  has  over  and  over  again  been 
stopped.  But,  if  the  banker  is  forbidden  to  use 
his  reserve  because  of  the  legal  limit  imposed  by 
the  Government,  he  is  stopped  from  adopting  the 
one  means  which  experience  has  shown  to  be  most 
efficacious  in  time  of  trouble. 

It  may  perhaps  be  objected  that  the  statement 
that  the  banks  manufacture  the  cheque  currency  is 
incorrect,  seeing  that  it  is  not  the  banks  but  their 
customers  who  are  responsible  for  the  creation  of 
the  banking  deposits  which  represent  the  right  to 
draw  a  cheque.  But  it  seems  to  me  that  there  is 
in  this  respect  no  essential  difference  between  the 
bank  notes  that  were  formerly  the  currency  of  the 
commercial  community  and  the  cheque  which  has 
now  taken  their  place.  Both  of  them  really  are 
created  by  the  action  of  the  banks  in  making  ad- 
vances to  customers,  whether  those  customers  be 
ordinary   commercial   borrowers   op  Governments 


36  THE  BUSINESS  OF  FINANCE 

who  issue  securities,  e.g,,  in  time  of  war,  and  place 
them  with  the  banks. 

In  old  times,  when  a  customer  went  to  a  banker 
for  a  loan,  the  banker,  if  he  agreed,  handed  him 
out  so  many  of  his  own  notes;  now  when  a  cus- 
tomer goes  to  a  banker  for  a  loan,  the  banker  gives 
him  a  credit  in  his  books,  i.e.,  adds  to  the  deposits 
on  the  liability  side  of  the  balance  sheet.  It  is  true 
that  the  customer  does  not  leave  the  deposit  there 
but  draws  cheques  against  it  which  he  pays  to 
people  to  whom  he  owes  money.  But  these  cheques, 
if  paid  to  recipients  w^ho  also  bank  at  the  bank 
which  has  made  the  advance,  would  simply  be  a 
transfer  within  the  bank's  own  books,  and  the 
effect  of  the  transaction  upon  its  balance  sheet 
would  be  that  it  would  hold  among  its  assets  an 
increase — if  the  loan  was  for  £100,000 — of  this 
amount  among  its  advances  to  customers;  and  on 
the  liability  side  there  would  be  a  similar  increase 
in  the  deposits.  In  the  ordinary  course  of  affairs, 
of  course,  it  would  not  always  happen  that  the  par- 
ties to  whom  the  cheques  were  paid  would  also 
bank  with  the  same  bank.  They  would  pay  the 
cheques  into  their  own  banks,  whose  deposits  would 
be  increased,  and  if  we  could  look  at  an  aggregate 
balance  sheet  of  the  w^hole  of  the  banks  of  the  coun- 
try we  should  see  that  any  increase  in  loans  and 
advances  would  have  this  effect  of  increasing  the 
deposits  as  long  as  those  who  receive  these  bank- 
ing credits  make  use  of  them  by  drawing  cheques 
against   them.     In  the  comparatively  rare  cases 


THE  PROVISION  OF  CURRENCY       37 

where  the  borrower  makes  use  of  the  credit  by 
drawing  out  coin  or  notes  from  the  bank,  then  the 
first  effect  would  be  that  the  bank  in  question  would 
hold  a  smaller  amount  of  cash  among  its  assets 
and  a  larger  amount  of  advances  to  customers. 
But  even  here  the  currency  withdrawn  would  al- 
most certainly  come  round  again  either  to  this  bank 
or  another  from  the  shopkeepers  or  other  people 
to  whom  the  borrower  had  made  payments.  And 
so  the  cash  resources  of  the  banks,  as  a  whole,  would 
be  restored  to  the  original  level  while  the  deposits, 
owing  to  the  increase  at  the  credit  of  the  shop- 
keepers and  others  who  had  paid  the  money  in, 
would  be  added  to  by  the  amount  of  the  advance 
originally  made. 

Exactly  the  same  thing  happens  when,  for  exam- 
ple, in  time  of  war  the  banks  subscribe  to  loans 
issued  by  the  Government,  whether  in  the  form  of 
long-dated  loans,  such  as  the  recent  War  Loan,  or 
in  the  form  of  shorter  securities,  such  as  Exchequer 
Bonds,  Treasury  Bills,  or  Ways  and  Means  Ad- 
vances. The  bank  takes  a  security  from  the  Gov- 
ernment and  pays  for  it  with  a  draft  on  its  balance 
at  the  Bank  of  England.  It  thus  holds  for  the  time 
being  a  smaller  amount  of  cash  at  the  Bank  of 
England  and  a  larger  amount  of  Government  se- 
curity. But,  as  the  Government  draws  on  its  bal- 
ance at  the  Bank  of  England,  the  cheques  which 
it  pays  to  contractors  and  other  people  to  whom 
it  owes  money  are  paid  in  by  them  to  their  banks, 
and  so  the  banks  have  their  cash  restored  to  them 


38  THE  BUSINESS  OF  FINANCE 

and  the  deposits  of  their  customers,  the  contractors 
and  others,  are  increased  by  the  amount  of  the 
securities  taken  by  the  banks. 

It  follows  that  the  common  belief  that  a  great 
increase  in  bank  deposits  means  that  the  wealth 
of  the  community  has  grown  rapidly  and  that  peo- 
ple are  saving  money  and  depositing  more  with  the 
banks  is  to  a  certain  extent  a  fallacy.  A  rise  in 
bank  deposits,  as  a  rule,  means  that  the  banks  are 
making  large  advances  to  their  customers  or  in- 
creasing their  holding  of  securities,  and  so  are 
granting  a  larger  amount  of  bookkeeping  credit, 
which  appears  as  a  liability  to  the  public  in  the 
shape  of  deposits. 

It  may  be  objected  that  the  deposits  have  to  come 
first  before  the  banks  can  make  advances.  Does 
this  necessarily  follow?  Even  if  a  bank  were  start- 
ing business  to-day,  it  would  begin  with  a  certain 
amount  of  capital  which  would  probably  be  paid 
to  it  in  the  form  of  cheques  on  other  banks.  By 
means  of  these  cheques  it  would  possess  itself  of 
a  balance  at  the  Bank  of  England  and  also,  prob- 
ably, a  certain  amount  of  legal  tender  cash  in  the 
form  of  notes.  Bank  of  England  or  Treasury,  and 
coin.  It  would  then  be  in  a  position  to  make  ad- 
vances to  a  certain  extent  without  having  received 
any  deposits,  and  its  customers  paying  into  it 
cheques  on  other  banks,  the  right  to  draw  which 
had  been  conferred  by  advances  from  them,  would 
increase  its  deposits  in  the  manner  above  described. 
And  in  the  case  of  an  existing  bank,  which  already 


THE  PROVISION  OF  CURRENCY        39 

has  a  large  holding  of  cash  in  hand  at  the  Bank  of 
England,  it  is  certainly  in  a  position  to  make  an 
advance  without  waiting  to  receive  a  further  de- 
posit first.  It  comes  to  this  that,  whenever  a  bank 
makes  an  advance  or  buys  a  security,  it  gives 
someone  the  right  to  draw  a  cheque  upon  it, 
which  cheque  will  be  paid  in  either  to  it  or  to 
some  other  bank,  and  so  the  volume  of  banking 
deposits  as  a  whole  will  be  increased  and  the 
cash  resources  of  the  banks  as  a  whole  will  be 
unaltered. 

It  does  not  follow  that  this  is  the  only  means 
by  which  the  deposits  of  the  banks  and  the  cheque 
currency  by  which  they  are  passed  from  hand  to 
hand  can  be  increased.  That  will  also  follow  if 
gold  is  imported,  the  effect  of  which  will  be  that 
the  party  to  whom  it  is  sent  will  probably  deliver 
it  to  the  Bank  of  England  and  pay  into  his  own 
banker  a  draft  upon  the  Bank  of  England  for  its 
value.  This  will  certainly  be  the  process  if  the  im- 
port of  gold  is  in  the  form  of  bars.  If  it  is  in  the 
form  of  sovereigns  it  may,  very  likely,  be  paid 
straight  into  the  receiver's  own  bank.  In  either 
case  the  banker  will  hold  a  larger  amount  of  cash, 
either  in  hand  or  at  the  Bank  of  England,  and  the 
customer  will  be  credited  with  a  like  amount  on 
his  current  or  deposit  account. 

It  may  also  happen,  at  times  when  trade  is  quiet, 
that  coin  and  notes  which  have  been  in  circulation 
may  be  paid  into  banks  and  accumulate  there  and 
80  increase  the  amount  of  the  banks'  cash  on  the 


40  THE  BUSINESS  OF  FINANCE 

one  side  and  deposits  on  the  other.  But  these 
movements  are  comparatively  small  in  the  total 
of  banking  figures,  and  the  growth  of  deposits  is 
chiefly  affected  by  the  action  of  the  banks  in  making 
advances  or  increasing  their  holding  of  securities. 
In  the  ordinary  business  of  life  it  does  not  happen 
to  anybody  except  shopkeepers  and  other  retail 
dealers  to  pay  actual  cash  into  their  banking  ac- 
c?ount.  To  take  my  own  example  as  an  average 
salary-earner,  it  has  never  happened  to  me  in  the 
course  of  the  thirty  odd  years  in  which  I  have  had 
a  banking  account  to  pay  into  it  anything  but  a 
cheque  drawn  on  a  bank.  It  is  very  important  that 
this  function  of  the  banks  in  increasing  or  decreas- 
ing by  their  own  action  the  volume  of  bank  depos- 
its and  consequently  of  the  cheques  that  may  be 
drawn  against  them  should  be  clearly  recognised. 
Money  at  the  bank  is  just  the  same  in  its  practical 
effect  upon  a  man's  state  of  mind  as  money  in  the 
pocket.  Money  in  the  pocket  has  no  effect  upon  the 
price  of  goods.  It  is  only  when  it  comes  out  of  the 
pocket  and  is  exchanged  for  some  commodity  that 
it  takes  the  form  of  an  effective  demand  for  goods. 
But  the  possession  of  money  in  the  pocket  is  likely 
to  stimulate  the  human  craving  to  spend  it,  and 
it  is  exactly  the  same  thing  in  the  case  of  bank 
deposits  which  are  potential  currency,  and  become 
actual  currency  when  they  are  used  by  the  drawing 
of  cheques  upon  them. 

When  once  this  fact  is  recognised,  that  the  banks 
are  still,  among  other  things,  manufacturers  of 


THE  PROVISION  OF  CURRENCY        41 

money,  just  as  much  as  they  were  in  the  days  when 
they  issued  notes,  we  see  how  important  a  function 
the  banks  exercise  in  the  economic  world,  because  it 
is  not  generally  admitted  that  the  volume  of  cur- 
rency created  has  a  direct  and  important  effect 
upon  prices.  This  arises  from  what  is  called  the 
"quantity  theory"  of  money,  which  has  long  been 
accepted  as  a  truism  by  economists  and,  though 
it  is  still  occasionally  called  in  question,  it  can  only, 
as  it  seems  to  me,  be  upset  if  it  is  complicated  by 
irrelevant  issues. 

The  quantity  theory  of  money  seems  to  me  to  be 
entirely  clear  and  convincing  to  common-sense  if 
we  keep  it  sufficiently  broad  and  simple,  and  ex- 
press it  by  saying  that,  if  the  volume  of  money  is 
increased  more  rapidly  than  the  volume  of  goods 
coming  to  market,  then  there  will  be  a  general  rise 
in  the  price  of  goods  and  vice  versa.  But,  in  order 
that  it  may  be  true,  it  is  necessary  that  the  word 
"money"  should  be  taken  in  the  broad  sense  in 
which  I  have  used  it,  i.e.,  all  articles,  whether  coin 
or  pieces  of  paper,  which  are  commonly  taken  in 
exchange  for  goods.  Failure  to  treat  the  problem 
on  this  broad  and  simple  line  constantly  leads  to 
confusion. 

It  has  been  argued,  for  example,  by  an  economic 
professor  who  has  lately  written  a  very  interesting 
book  on  the  subject  of  money,  that  the  quantity 
theory  seems  to  have  been  disproved  by  the  events 
of  the  present  war.  Professor  Todd,  in  his  Mech- 
anism of  Exchange^  p.  166,  remarks : 


42  THE  BUSINESS  OF  FINANCE 

"It  must  next  be  asked  whether  the  experience 
of  the  war  had  any  effect  upon  the  theory  either 
in  the  direction  of  confirming  it  or  otherwise.  Cer- 
tainly the  facts  are  sufficiently  striking,  and  at  first 
sight  they  seem  entirely  incapable  of  any  explana- 
tion which  would  be  in  the  least  consistent  with 
the  theory.  For  the  facts  are  that  the  general  level 
of  prices  has  risen  since  the  war  beyond  all  ex- 
perience in  modern  times,  while  the  gold  output  has 
remained  practically  as  it  was  before  the  war." 

Professor  Todd  is  by  no  means  the  first  who  has 
complicated  the  simplicity  of  the  quantity  theory 
by  considering  that  it  can  only  be  shown  to  be  true 
if  a  direct  relation  can  be  shown  between  the  quan- 
tity of  gold  and  the  movement  of  prices.  It  is  at 
all  times  easy  to  question  this  contention,  because 
the  quantity  of  credit  created  by  bankers  does  not 
necessarily  vary  exactly  with  the  amount  of  gold 
that  is  available  for  its  basis,  and  in  war  time, 
when  for  patriotic  and  other  reasons  gold  can  be 
husbanded  for  war  purposes  and  credit  can  be  cre- 
ated with  much  less  attention  than  usual  to  the 
question  of  a  gold  basis  for  it,  the  relation  between 
gold  and  prices  is  more  than  ever  illusive.  Never- 
theless, if  we  take  money  in  the  wide  sense  in 
which  it  is  used  in  this  chapter,  as  including  all 
forms  of  currency,  and  especially  cheques,  that 
are  taken  in  payment  for  goods,  it  appears  to  me 
that  the  quantity  theory  is  so  true  as  to  amount  to 
a  truism.  It  merely  comes  to  this : — Money  is  cre- 
ated faster  than  goods;  there  is  more  money  in  the 


THE  PROVISION  OF  CURRENCY        43 

hands  of  the  community  that  is  purchasing  the 
goods;  their  purchasing  power  is  consequently  in- 
creased while  at  the  same  time  the  quantity  of 
goods  to  be  purchased  remains  stationary  or  is 
diminished.  That  a  rise  in  prices  should  follow 
from  such  a  process  seems  to  be  as  inevitable  as 
anything  in  economic  science. 

It  is,  however,  often  contended  that  a  rise  in 
prices,  for  example  during  war  time,  would  have 
happened  anyway  owing  to  the  increased  demand 
for  certain  commodities,  and  that  the  increase  of 
currency  followed  this  rise  in  prices,  being  neces- 
sitated or  justified  by  it,  and  that  therefore  the  rise 
in  prices  came  first  and  caused  the  increase  in  cur- 
rency. 

This  argument  appears  to  me  to  ignore  the  fact 
that  a  general  rise  in  prices  is  only  possible  if  there 
is  a  general  increase  in  effective  demand,  a  demand 
that  is  to  say  on  the  part  of  people  who  have  money 
in  their  hands  with  which  to  bid  and  to  buy,  and 
that  this  increased  demand  cannot  happen  unless 
there  is  an  increase  in  available  currency.  As  John 
Stuart  Mill  says,  "The  demand  which  influences 
the  prices  of  commodities  consists  of  the  money 
offered  for  them."*  Unquestionably  the  changes  in 
consumption  that  war  brings  about  would,  without 
any  increase  in  currency,  have  produced  a  rise  in 
the  prices  of  certain  commodities.  Food,  for  exam- 
ple, being  consumed  on  a  much  more  generous  scale 


*  Political  Economy,  Book  III,  Ch.  xii,  2, 


44  THE  BUSINESS  OF  FINANCE 

by  soldiers  in  training  or  in  the  field  than  it  was 
by  the  same  men  in  civil  life,  and  a  more  generous 
diet  being  also  required  by  the  industrial  popula- 
tion owing  to  the  strain  on  its  energy  in  the  pro- 
duction of  munitions,  would  certainly  have  risen 
in  price  on  or  soon  after  the  outbreak  of  war.  But, 
if  there  had  been  no  accompanying  increase  in  the 
currency,  it  surely  would  have  happened  that  the 
larger  volume  of  money  absorbed  by  the  purchases 
of  food  at  the  higher  prices  current  would  have 
withdrawn  the  amount  of  money  available  for  pur- 
chases of  other  goods,  and  that  consequently  a  fall 
in  their  prices  would  have  compensated  for  the  rise 
in  the  prices  of  food.  If  this  be  so,  then  a  general 
rise  in  prices,  such  as  has  been  seen  during  the 
course  of  the  present  war,  could  only  be  accounted 
for  by  the  fact  that  all  the  belligerent  Governments 
have  been,  with  or  without  the  help  of  the  banking 
machinery  of  their  countries,  increasing  very  rap- 
idly the  use  of  the  printing  press  and  the  activities 
of  the  bankers*  ledger  clerks  who  chronicle  the 
creation  of  banking  credit. 

By  this  process  the  said  belligerent  Governments 
were  enabled  to  collect,  either  from  the  banks  or 
from  the  pockets  of  their  citizens,  large  amounts  of 
gold  which  were  no  longer  needed  for  currency  and 
to  ship  them  to  neutral  countries,  so  that  an  enor- 
mous bloated  balloon  of  world-wide  inflation  was 
created,  since  in  all  countries  of  the  civilised  world 
the  same  phenomenon  was  visible  of  an  increase  in 
currency,  either  produced  by  the  printing  press  or 


THE  PROVISION  OF  CURRENCY        45 

bookkeeping,  or  by  abnormal  imports  of  gold,  and 
at  the  same  time  either  a  diminution  in  the  pro- 
duction of  goods  owing  to  the  absorption  of  man- 
power into  the  armies,  or,  in  the  neutral  countries, 
an  increase  in  production,  which,  being  hampered 
by  the  difficulty  of  obtaining  raw  material,  did  not 
keep  pace  with  the  increase  in  the  amount  of  cur- 
rency available. 

It  may  be  that  it  is  dangerous  to  simplify  the 
quantity  theory  too  severely.  It  is  sometimes  pos- 
sible to  arrive  at  simplicity  and  clearness  by  ig- 
noring facts  which  ought  to  be  taken  into  account. 
We  must  not  forget  that  an  increase  in  currency 
will  have  no  effect  upon  prices  if  the  currency  is 
not  turned  over;  that  money  in  our  pockets  or  at 
our  bank  as  balances,  though  it  has  a  psychological 
effect  upon  our  readiness  to  spend,  has  no  actual 
effect  upon  prices  until  we  make  use  of  it  in  order 
to  buy,  and  that,  on  the  other  hand,  although  it  may 
be  said  that  the  quantity  of  goods  coming  forward 
for  consumption  is  to  a  certain  extent  limited  by  the 
productive  power  of  the  country  and  of  its  neigh- 
bours with  which  it  deals,  yet  there  are  at  all  times 
in  all  countries  a  great  mass  of  goods,  in  the  widest 
sense  of  the  word,  such  as  houses  and  securities, 
which  may  at  any  time  come  into  the  market. 

It  seems  to  me,  however,  that  these  considera- 
tions, though  they  must  not  be  lost  sight  of,  do  not 
in  any  way  shake  the  truth  of  the  quantity  theory 
as  a  broad  principle.  If  a  larger  quantity  than 
usual  of  the  commodities,  such  as  houses,  which  do 


46  THE  BUSINESS  OF  FINANCE     ^ 

not  often  change  hands,  come  into  the  market,  that 
would  simply  mean  that  the  supply  of  goods  for 
sale  would  be  thereby  to  that  extent  increased  for 
the  time  being,  and  that  these  sales  would  check 
and  perhaps  reverse  any  rise  in  prices  that  had 
previously  been  caused  by  currency  inflation.  But, 
if  we  keep  our  attention  fixed  hard  upon  the  fact 
that,  however  much  a  man  may  covet  and  desire 
to  possess  an  article  that  he  sees  for  sale,  he  can- 
not exercise  any  economic  effect  upon  it  unless  he 
produces  some  form  of  currency  wherewith  to  pur- 
chase it,  it  then,  surely,  follows  that  a  general  rise 
in  prices  can  only  happen  if  this  power  to  purchase 
is  increased  by  an  addition  to  the  volume  of  cur- 
rency. 

If,  then,  the  quantity  theory  is,  as  I  believe, 
broadly  true,  we  see  how  great  is  the  responsibility 
of  the  bankers  as  manufacturers  of  currency,  see- 
ing that  by  their  action  they  affect,  not  only  the 
convenience  of  their  customers  and  the  profits  of 
their  shareholders,  but  the  general  level  of  prices. 
If  the  banks  create  currency  faster  than  the  rate 
at  which  goods  are  being  produced,  their  action  will 
cause  a  rise  in  prices  which  will  have  a  perhaps 
disastrous  effect  upon  the  lives  of  those  who  are 
struggling  with  a  bare  margin  of  subsistence,  and 
may  produce  industrial  unrest  with  social  and  po- 
litical consequences  which  may  be  far-reaching  and 
disastrous. 

In  normal  times,  the  process  of  over-production 
of  currency,  or  inflation  as  it  may  for  short  be 


THE  PROVISION  OF  CURRENCY        47 

called,  is  usually  corrected  if  it  is  confined  to  any 
particular  country,  because  the  effect  of  it  is  to  raise 
prices  in  that  country  above  the  world  level  and 
so  to  increase  imports  into  it  and  check  exports 
from  it.  By  this  process,  in  the  first  place,  goods 
pour  into  the  country  and  so  check  the  dispropor- 
tion between  goods  and  currency,  and  a  further 
consequence  is  that  the  course  of  the  exchanges 
goes  against  the  country  in  which  inflation  is  prac- 
tised; gold  is  drawn  away  from  it,  and  an  auto- 
matic remedy  is  thus  very  opportunely  prescribed 
for  the  disease  by  the  beautifully  balanced  work- 
ing of  the  mechanism  of  exchange.  But  as  it  is 
probably  usual  that  the  state  of  mind  in  which 
bankers  over-produce  currency  is  general  through- 
out the  civilised  world,  which  is  now  knit  by  the 
telegraph  into  not  only  one  great  market  but  into 
one  great  mob,  swayed  at  the  same  time  by  similar 
influences,  similar  optimisms  and  similar  falla- 
cies, it  is  more  than  likely  that  this  nicely  balanced 
process  of  correction,  which  applies  itself  readily 
enough  if  inflation  is  only  practised  in  one  country, 
will  fail  to  work  when  inflation  is  busy  all  over  the 
world. 

Since,  then,  variations  in  the  quantity  of  cur- 
rency have  these  widespread  effects,  it  is  a  matter 
which  bankers  have  to  consider  seriously,  how  far 
it  is  possible  for  them  to  apply  some  scientiflc  reg- 
ulation to  the  volume  of  currency,  and  whether  it 
is  possible  to  modify  the  evils  that  follow  wide 
fluctuations  in  prices  by  some  such  regulation. 


48  THE  BUSINESS  OF  FINANCE 

It  may  be  observed  that,  on  the  whole,  the  effect 
of  a  moderate  and  steady  process  of  inflation  acts 
as  a  tonic  for  the  economic  body.  If  it  be  true 
that  a  slight  excess  of  currency  creation  ahead  of 
the  production  of  goods  causes  a  slight  and  steady 
advance  in  prices,  then  we  see  that  it  is  exactly 
the  state  of  things  required  in  order  to  stimulate 
the  activity  of  production,  give  manufacturers  and 
merchants  confidence  in  the  course  of  prices  and  so 
increase  their  readiness  to  indulge  in  fresh  enter- 
prise, open  up  new  fields  of  production,  pay  good 
wages  to  their  workers,  and  so  at  the  same  time 
increase  the  volume  of  goods  for  consumption  on 
which  mankind's  welfare  depends  and  improve  their 
distribution,  which  is  so  important  to  the  general 
contentment.  All  these  things  could  be  secured 
if  we  could  be  sure  that  all  new  currency  created 
by  bankers  was  placed  at  the  disposal  of  genuine 
producers  who  could  make  use  of  it  in  order  to 
increase  the  volume  of  goods,  and  so  help  to  main- 
tain equilibrium  between  goods  and  currency. 

Such  a  state  of  things  would  be  in  many  ways 
beneficial,  as  is  shown  by  the  fact  that  it  has  been 
seriously  argued  by  a  great  historian  that  the  de- 
cline and  fall  of  the  Roman  Empire  was  really  due 
to  the  lack  of  precious  metals  and  the  consequent 
fall  in  prices  which  took  all  the  heart  out  of  the 
industrial  enterprise  of  the  traders  and  merchants 
of  those  days.  It  is  perhaps  a  little  diflScult  to 
believe  that  a  mere  deficiency  in  what  is,  after  all, 
only  a  piece  of  mechanism  in  exchange  can  have 


THE  PROVISION  OF  CURRENCY        49 

had  so  wide-reaching  an  effect ;  but  it  is  easy  enough 
to  understand  that  a  steady  fall  in  prices,  continued 
over  long  periods,  would  produce  a  state  of  very 
great  depression  among  those  responsible  for  in- 
dustry, and  that  few  would  be  inclined  to  open  up 
fresh  productive  ventures  with  the  chance  before 
them  that,  before  their  ventures  could  pro- 
duce anything  ready  for  the  market,  the  market 
price  would  have  run  away  from  them  and 
left  them  with  a  balance  on  the  wrong  side  of  the 
ledger. 

There  can  be  no  question  that  rising  prices  stimu- 
late industry  while  falling  prices  discourage  it. 
Rising  prices  put  money  into  the  pockets  of  pro- 
ducers and  those  who  are  responsible  for  keeping 
the  wheels  of  industry  spinning,  and  they  take  it  out 
of  the  pockets  of  the  rentier  class  living  on  the 
interest  of  saved  or  inherited  money.  Between  these 
two  classes  there  is  no  doubt  as  to  the  interest  of 
which  should  be  encouraged  from  the  point  of 
view  of  human  progress.  But  we  have  to  remember 
that  the  rentier  class,  though  not  apparently  as  use- 
ful as  the  active  producer  who  is  putting  all  his 
energy  into  making  goods  for  our  consumption,  is 
nevertheless  essential  to  the  progress  of  industry. 
If  the  course  of  currency  creation  is  such  that  a  man 
who  is  living  on  invested  funds  gets  a  smaller  and 
smaller  share  of  the  world's  goods  in  return  for  the 
money  that  he  receives  in  interest,  then  the  process 
of  accumulation  and  the  saving  of  capital  will  be 
checked,  and  it  will  be  shown  in  a  later  chapter  how 


60  THE  BUSINESS  OF  FRANCE 

this  process  of  saving  is  necessary  if  the  progress 
of  industry  is  to  be  maintained. 

There  is  another  highly  important  consideration 
attaching  to  this  question  of  a  general  rise  in  prices 
produced  by  currency  inflation,  and  that  is  the  fact 
that  experience  shows  that  the  movement  of  wages 
does  not  as  a  rule  keep  pace  with  the  movement  of 
prices  but  lags  behind  them,  usually  by  an  interval 
of  three  to  six  months.  As  long  as  this  is  true, 
falling  prices  are  an  advantage  to  the  working 
classes  and  rising  prices  are  against  them,  and  so 
rising  prices  tend  to  produce  dissatisfaction  and 
industrial  unrest.  It  is  well  known  that,  in  Eng- 
land, for  some  ten  years  before  the  present  war, 
though  money  wages  had  slowly  risen,  the  rise  in 
prices  had  gone  faster,  that  the  working  classes  were 
highly  dissatisfied  with  this  state  of  affairs  and 
that,  if  the  war  had  not  happened,  there  was  every 
appearance  of  an  outbreak  of  industrial  strife  on  a 
scale  that  had  never  before  been  witnessed.  It  is 
possfble  that,  as  the  organisation  and  education  of 
the  working  classes  progress,  they  may  be  able  to 
correct  this  tendency  for  wages  to  lag  behind  prices 
when  prices  are  moving  upwards.  But,  as  things 
are,  the  fact  that  rising  prices,  if  continued  too  far 
and  too  long,  tend  to  check  accumulation  and  to 
produce  industrial  unrest,  is  a  very  serious  draw- 
back to  put  on  the  other  side  of  the  account  as 
against  the  encouragement  that  they  give  to  the 
energetic  producer  and  to  those  who  benefit  from 
the  extra  profits  produced  by  higher  prices. 


THE  PROVISION  OF  CURRENCr        51 

This  being  so,  the  ideal  to  be  aimed  at  would  seem 
to  be  steadiness  in  prices ;  in  other  words,  it  is  the 
business  of  finance  to  consider  whether  it  cannot 
regulate  the  general  level  of  prices  by  somehow 
maintaining  more  or  less  constant  equilibrium  be- 
tween the  production  of  goods  and  the  creation  of 
currency.  If  all  currency  creation  consisted  of  bank- 
ers' credits,  then  it  would  clearly  be  possible  for  an 
ideal  banking  system,  worked  by  ideal  bankers,  for 
the  convenience  of  ideal  customers,  to  produce  the 
required  equilibrium  or  very  nearly.  If  they  satis- 
fied themselves  every  time  that  they  made  an  ad- 
vance that  the  credit  so  created  was  going  to  be  used 
in  increasing  the  production  of  goods,  the  problem 
would  be  in  a  fair  way  to  solution.  But,  in  the  first 
place,  the  relations  between  bankers  and  customers 
do  not  at  present  permit  this  simple  process  of 
regulation,  and,  in  the  second,  as  we  have  seen,  the 
manufacture  of  currency,  though  to  a  great  extent 
in  the  hands  of  the  bankers,  is  subject  to  conditions 
over  which  they  have  no  control.  One  of^hese 
conditions  is  the  amount  of  gold  available.  When 
the  production  of  gold  is  rapidly  increased,  not  only 
is  there  so  much  extra  buying  power  in  the  form 
of  coins  struck  from  the  gold,  but,  since  the  increase 
in  the  gold  available  enables  bankers  to  issue  a  very 
much  larger  amount  of  paper  credit  against  it,  it 
follows  that  activity  on  the  part  of  gold  miners  has, 
or  may  have,  an  effect  upon  world  prices  which  is 
much  greater  than  the  actual  addition  to  currency 
which  they  themselves  take  out  of  the  bowels  of  the 


52  THE  BUSINESS  OF  FINANCE 

earth.  It  seems  at  first  sight  absurd  that  at  this 
stage  of  our  economic  civilisation  such  an  important 
matter  as  world-wide  price  movements  should  de- 
pend upon  the  pace  at  which  a  certain  kind  of  metal 
is  dug  out  by  miners ;  and  in  these  times,  when  there 
s  a  general  tendency  to  question  and  criticise  all 
human  institutions,  the  dependence  of  man  on  gold 
as  an  essential  part  of  the  machinery  of  finance  is 
naturally  scoffed  at  by  the  sceptical  and  pointed  to 
as  a  clumsy  survival  of  medieval  or  even  neolithic 
barbarism.  It  has  even  been  suggested  that  the 
experience  of  the  war  may  lead  the  way  to  a  general 
demonetisation  of  gold  and  the  substitution  for  it 
of  a  scientifically  regulated  currency. 

It  seems  to  me  that  the  financial  and  industrial 
problems  which  will  face  us  when  the  war  is  over 
are  quite  serious  and  diflScult  enough  without  com- 
plicating them  still  further  by  an  attempt  to  in- 
stitute a  currency  reform  or  change  which  might 
have^onsequences  quite  unforeseen.  It  is  the  un- 
comiWtable  habit  of  economic  changes  to  run  away 
with  those  who  introduce  them  and  produce  results 
often  quite  contrary  to  the  intentions  of  the  reform- 
ers. Gold  has  got  such  influence  upon  the  human 
mind,  owing  to  centuries  of  habit  and  convention, 
that  it  is  still  regarded  as  the  one  commodity  which 
can  always  certainly  be  relied  upon  in  times  of 
acute  crisis.  Even  now,  when  it  has  been  made  clear 
that  it  is  everyone's  duty  to  pay  in  all  the  gold  they 
possess  through  their  banks,  so  that  it  may  be  used 
for  war  purposes,  I  have  been  lately  told  by  many 


THE  PEOVISION  OF  CURRENCY        53 

quite  reasonable  people  in  England,  among  them  an 
economic  professor,  that  they  are  still  keeping  a  few 
sovereigns  locked  up  in  case  of  anything  that  may 
happen.  I  believe  this  prejudice  in  favour  of  gold 
to  be  so  ingrained  that  any  attempt  to  try  to  hasten 
the  process  by  which  substitutes  for  gold  are  used, 
these  substitutes  being  mere  tokens  issued  by  a 
Government  with  no  promise  to  pay  gold  behind 
them,  might  have  disastrous  effects.  It  will  be  a 
great  economy  if  the  day  ever  comes  when  peoples 
have  sufficient  confidence  in  their  Governments  and 
in  their  bankers  to  feel  sure  that  pieces  of  paper 
issued  by  them  will  always  be  taken  in  exchange  for 
goods  without  any  intermediate  process  of  exchange 
into  gold  and  the  exchange  of  the  gold  into  goods. 
But  it  seems  to  me  that  it  will  take  about  a  century 
of  economic  education  before  we  can  arrive  at  that 
ideal  and  that  if  in  the  meantime  we  try  to  take 
short  cuts  we  might  find  ourselves  landed  in  a  very 
uncomfortable  position. 

An  obvious  first  step  would  be  to  cease  the  coining 
of  gold  for  internal  use  and  to  make  credit  instru- 
ments convertible  into  bar  gold  for  purposes  of 
international  payment. 

But  it  is  the  business  of  those  who  are  responsible 
for  the  machinery  of  finance,  in  the  first  place,  to 
work  it  in  such  a  manner  that  equilibrium  between 
goods  and  currency  shall  be  as  far  as  possible  main- 
tained,  so  that  the  course  of  prices  may  be  kept 
steady  and  that  the  even  progress  of  mankind^s 
economic  development  may  be  as  little  as  possible 


64  THE  BUSINESS  OF  FINANCE 

disturbed  by  wild  fluctuations  from  periods  of  ex- 
cessive optimism  and  boom  with  their  inevitable 
reactions  into  depression,  occasionally  intensified 
by  panic. 


CHAPTER  III 

CBEDIT 

In  the  last  chapter  it  was  shown  that  the  most 
important  of  the  modern  forms  of  currency,  namely 
the  cheque,  is,  in  effect,  manufactured  for  the  use 
of  its  customers  by  banks ;  and,  further,  that  since 
the  volume  of  currency  has  an  important  effect  up- 
on raising  prices,  the  extent  to  which  currency  is 
thus  created  is  a  responsibility  which  has  to  be 
seriously  considered  by  those  who  work  the  finan- 
cial machine.     This  manufacture  of  currency  is 
worked  through  the  granting  of  credit,  and  credit 
may  thus  be  defined,  for  the  purposes  of  this  enquiry, 
as  the  process  by  which  finance  makes  currency  for 
its  customers.    As  we  saw  in  the  last  chapter,  de- 
posits, which  are  potential  currency,  as  they  carry 
with  them  the  right  to  draw  a  cheque,  are  produced 
largely  through  the  loans,  discounts  and  invest- 
ments made  by  bankers.    In  the  ordinary  sense  of 
the  word,  credit  usually  carries  a  wider  meaning, 
covering  any  kind  of  arrangement  by  which  a  seller 
takes  from  the  party  who  wishes  to  secure  goods 
from  him  some  form  of  engagement  that  payment 
for  the  goods  will  be  made  at  a  future  date.    In 

55 


56  THE  BUSINESS  OF  FINANCE 

this  sense  of  the  word  it  is  a  credit  operation  when 
a  shopkeeper  sells  me  a  suit  of  clothes  on  the  under- 
standing that  he  will  send  me  in  an  account  some 
months  later  in  the  expectation  that  I  shall,  at 
some  time  or  other  after  the  bill  has  been  presented, 
pay  for  it.  Operations  of  this  kind,  however, 
though  of  considerable  importance  in  the  volume 
of  commercial  transactions,  do  not  come  within 
the  purview  of  the  machinery  of  finance.  Credit, 
in  the  truly  financial  sense,  is,  as  described  above, 
the  arrangement  by  which  the  financial  machinery 
gives  its  customers  facilities  which  enable  them  to 
provide  themselves  with  currency  to  go  into  the 
market  and  buy  commodities,  securities,  or  any- 
thing else  that  they  want  or  think  they  want 

In  order  to  see  more  clearly  the  method  by  which 
these  arrangements  are  made,  let  us  look  at  a  bal- 
ance sheet  of  what  was  then  the  biggest  English 
bank  at  the  end  of  June,  1914,  before  the  war  period 
began  to  complicate  and  expand  banking  figures. 
On  the  liabilities  side  we  find  the  following  items : — 

Millions 
Current,  Deposit  and  other  Accounts . .   107 

Bills  accepted  or  endorsed 4 

Capital 5 

Reserve  . .  •  •  •  •  •  •  —^^  • ^. 3>^ 

119  y2 


CREDIT  57 

The  Assets  were  as  follows: — 

Millions 
Cash  in  hand  and  at  Bank  of  England . .  18 
Liabilities  of  Customers  for  bills  ac- 
cepted or  endorsed 4 

Premises  3 

Investments 13 

Cash  at  call  and  short  notice 10  >4 

Bills  of  Exchange 14>^ 

Advances  to  Customers 56  >^ 


119  >^ 


If  we  examine  this  balance  sheet  we  see  that 
the  bank's  own  capital  and  reserve  amount  to  8>4 
millions  and  that  it  has  accepted  Bills — a  process 
which  will  be  explained  later — to  the  extent  of 
4  millions,  and  that  the  rest  of  its  liabilities  consist 
of  the  principal  item,  Current  and  Deposit  Ac- 
counts, for  107  millions.  The  other  side  shows  that 
it  has  made  advances  in  the  shape  of  Cash  at  call 
and  short  notice.  Bills  of  Exchange  and  Advances 
to  Customers,  for  a  total  of  81  ^  millions,  and  that 
its  investments  amount  to  13  millions;  so  that, 
against  its  deposits  of  107  millions  we  find  assets 
which  are,  in  one  form  or  another,  loans  and  in- 
vestments amounting  to  943^  millions. 

Examining  more  closely  the  process  by  which 
these  loans  and  investments  have  been  made,  we 
see  that  the  chief  item  in  the  process  is  the  big 


58  THE  BUSINESS  OF  FINANCE 

item,  Advances  to  Customers,  of  56  J^  millions.  This 
item  explains  itself,  being  obviously  loans  made 
to  the  customers  of  the  bank  against  any  collateral 
pledge  that  the  bank  may  think  adequate  or  pos- 
sibly, in  some  cases,  merely  against  the  good  faith 
and  known  high  financial  position  of  a  customer. 

What  the  bank  describes  as  "Cash  at  call  or  short 
notice"  consists  in  fact  of  loans  to  bill  brokers  and 
stock  brokers,  who  finance,  by  credits  granted  by 
the  banks,  their  holdings  of  bills  of  exchange,  if 
bill  brokers,  or  the  holdings  of  securities,  in  the 
case  of  the  stockbrokers,  which  their  clients  or 
themselves  have  purchased  in  the  hope  of  a  rise 
in  their  prices,  or  for  some  other  reason.  Loans  to 
bill  brokers  are  closely  connected  with  the  subject 
of  the  bill  of  exchange,  which  has  to  be  now  ex- 
plained as  a  highly  important  stone  in  the  financial 
edifice.  Originally,  as  all  men  know,  a  bill  of  ex- 
change was  an  order  drawn  by  a  seller  of  goods 
ordering  his  buyer  to  pay  the  money  due  for  the 
goods  to  himself,  the  seller,  or  to  the  order  of  any 
party  to  whom  the  seller  wished  the  money  to  be 
handed.  A.  sold  goods  to  B.  and  drew  a  bill  upon 
him  instructing  him  to  pay  the  money  to  him,  A., 
or  to  any  party  he  might  name.  The  original  bill 
was  thus  simply  a  memorandum,  sent  with  the 
goods,  instructing  the  buyer  as  to  how  he  should 
pay  for  them. 

Since  B.  might,  in  the  ordinary  course  of  trade, 
wish  for  time  before  handing  over  the  money,  so  that 
he  might  be  able  to  dispose  of  the  goods  to  retail 


CREDIT  59 

customers,  the  custom  rose  of  instructing  B.  to 
pay  the  money  not  at  once  but  at  some  date,  usually 
two  to  six  months  after  sight  of  the  bill  of  exchange. 
When  B.  recognised  that  the  order  to  pay  was  one 
which  he  was  bound  to  meet,  he  intimated  the  fact 
by  "accepting'*  the  bill,  that  is  to  say  writing  his 
name  across  the  front  of  it  and  adding  the  date 
of  acceptance.  The  date  of  acceptance  was  thus 
the  date  at  which  the  bill  was  first  sighted,  and  so 
the  life  of  the  bill,  two  or  six  months  after  sight, 
would  be  calculated  from  this  date  of  acceptance. 
The  bill,  being  thus  accepted,  could  be  turned  into 
cash  by  A.  or  his  agent  in  the  place  in  which  B. 
lived,  through  the  means  of  the  discordant  market, 
in  which  bills  drawn  and  accepted  by  people  of 
good  financial  standing  could  be  sold  for  cash  at  a 
discount  on  the  face  value  of  the  bill  calculated 
according  to  the  current  rate  of  interest. 

For  instance,  if  A.  drew  a  bill  on  B.  for  £1,000 
six  months  after  sight,  and  if  A.  and  B.,  especially 
B.,  who  was  first  liable  to  meet  the  bill,  were  men 
of  good  standing,  somebody  would  be  found  who 
would  give  A.  or  his  agent  £1,000  the  day  after 
acceptance,  less  a  discount  rate  which,  if  we  sup- 
pose it  to  be  5  per  cent,  per  annum,  would  mean 
that  £25  would  be  taken  off  the  face  value  of  the  bill, 
and  so  A.  would  immediately  become  possessed  of 
£975.  By  this  means  A.  would  get  his  money  at 
once,  B.  would  get  the  goods  and  could  work  them 
up  for  sale,  if  they  were  raw  materials,  or  could 
dispose  of  them  to  retail  customers  and  grant  them 


60  THE  BUSINESS  OF  FINANCE 

a  certain  amount  of  credit,  and  the  holder  of  the 
bill  had  a  temporary  investment  which  was  valu- 
able according  to  the  standing  of  the  parties  upon 
it,  and  which  carried  the  additional  advantage  thai 
on  maturity  the  money  had  to  be  paid. 

Since  it  was  difficult  for  dealers  in  bills  to  keep 
themselves  continually  advised  concerning  the 
standing  of  merchants  in  whose  acceptance  they 
dealt,  the  custom  arose  for  certain  eminent  finan- 
cial houses  to  specialise  in  this  business  of  accept- 
ance, accepting  bills  on  behalf  of  people  whose  finan- 
cial eminence  was  not  secure  in  return  for  a  small 
commission.  They  thus,  by  writing  their  names 
across  the  front  of  bills,  gave  them  first-rate  stand- 
ing, enabled  the  customers  who  had  paid  them  a 
commission  to  secure  the  advantages  of  the  gilt- 
edged  security  which  they  had  given  to  the  bill, 
and  provided  those  who  bought  the  bills  with  an 
even  more  unquestioned  security  than  that  of  the 
ordinary  merchant. 

In  England  it  has  long  been  the  custom  for  the 
banks  to  take  part  in  this  business  of  acceptance, 
and  we  saw  in  the  balance  sheet  given  above  that 
there  was  an  item  of  4  millions,  "Bills  accepted  or 
endorsed,"  against  which  the  bank  held  as  an  asset 
4  millions  in  the  form  of  the  liability  of  customers 
for. bills  accepted  or  endorsed.  This  means  to  say 
that  this  particular  bank  had  allowed  customers 
of  its  own,  probably  importing  merchants,  to  buy 
goods  chiefly  from  abroad  and  instruct  their  sellers 
to  draw  bills  against  the  shipment  of  the  goods, 


CREDIT  61 

not  upon  the  importing  merchants  but  upon  their 
bank,  so  giving  the  bank's  eminent  standing  to 
grace  the  bills  so  drawn.  The  customer,  however, 
was  himself  liable  to  put  the  bank  in  funds  to  meet 
the  bills  so  drawn  before  they  fell  due. 

If  we  take  the  case  of  a  Liverpool  merchant  im- 
porting cotton  from  an  American  seller,  and  in- 
structing the  American  seller  to  draw  on  a  London 
bank  bills  payable  60  days  after  sight,  then  the 
Liverpool  importer,  having  in  the  meantime  dis- 
posed of  the  cotton,  would  have  money  in  hand  to 
pay  into  the  bank  to  meet  the  bill  before  it  fell  due. 
The  bill  would  be  drawn  by  the  American  seller, 
sold  by  him  to  an  American  bank,  shipped  by  the 
American  bank  to  its  agent  in  London  to  be 
presented  for  acceptance,  and  then  sold  in  the 
London  discount  market.  This  selling  of  the 
bill  would  take  place  through  the  medium  of  a 
bill  broker,  who  would  buy  it  either  to  hold  him- 
self for  the  time  being,  or  to  sell  immediately  to 
one  of  the  great  London  bankers  which  are  ul- 
timately the  holders  of  a  large  part  of  the  best 
bills  that  come  to  London.  As  we  see  in  the  balance 
sheet  given  above,  this  particular  bank  has  a  hold- 
ing of  bills  of  exchange  amounting  to  14  >4  millions. 
Thus  the  banks  provide  the  money  which  these 
bills  of  exchange  produce  either  by  lending  it  to 
bill  brokers  under  the  item  "Cash  at  call  and  short 
notice,''  or  by  actually  investing  it  in  bills  of  ex- 
change under  the  item  so  expressed. 

The  acceptor  of  the  bill  does  not  in  the  normal 


e2  THE  BUSINESS  OF  FINANCE 

course  of  business  find  any  money  at  all.  He  puts 
his  name  upon  the  bill,  indicating  that  he  will  pay 
it  at  a  certain  date,  and  trusts  to  the  customer  to 
whom  he  has  lent  his  name  for  a  consideration  to 
provide  him  with  the  money  in  order  to  meet  the 
bill.  If  the  customer  fails  to  do  so,  he  then  has  to 
meet  it  out  of  his  own  funds.  The  credit  produced 
by  the  discounting  of  the  bill  is  found  by  the  pur- 
chaser of  the  bill,  in  most  cases  either  a  banker 
or  a  bill  broker  to  whom  a  banker  has  advanced  the 
necessary  funds. 

The  creation  of  credit  is  thus  seen  clearly  to  re- 
sult in  the  manufacture  of  currency  whenever  the 
banks  buy  bills  of  exchange  for  investment,  or  make 
an  advance  to  bill  brokers  in  order  to  enable  them 
to  carry  their  stock  of  bills.  In  either  case  the 
banks  give  somebody  the  right  to  draw  cheques. 
It  should  be  explained  that  the  bill  brokers  act 
largely  as  merchants  in  bills  of  exchange,  buy- 
ing them  wholesale  as  they  come  forward  from 
the  agents  of  the  foreign  exporters  and  gradually 
selling  them  to  the  banks  to  meet  the  require- 
ments of  the  latter  in  the  matter  of  names  and 
dates. 

When  a  bank  makes  an  advance  to  a  stock  broker 
to  assist  in  the  process  by  which  securities  are 
financed  that  have  not  yet  found  an  ultimate  home, 
the  result  is  exactly  the  same.  The  bank  makes  an 
advance  on  the  pledge  of  the  securities  held  and  of 
the  standing  of  the  stockbroker,  and  the  stockbroker 
is  thus  enabled  to  pay,  on  behalf  of  his  customer,  the 


CREDIT  63 

seller  of  the  securities,  or  the  issuing  house  which  is 
bringing  out  a  new  security. 

The  same  result,  in  rather  a  different  form,  hap- 
pens when  a  bank  makes  investments  on  its  own  ac- 
count. It  pays  for  the  securities  bought,  probably 
with  a  draft  on  its  balance  at  the  Bank  of  England, 
whereby  its  holding  of  cash  at  the  Bank  of  Eng- 
land is  reduced  and  its  holding  of  securities  is  in- 
creased. The  seller  of  the  stock,  to  whom  it  pays 
the  cheque,  pays  it  probably  into  some  other  bank, 
which  thus  has  its  cash  at  the  Bank  of  England 
increased  and  has  a  corresponding  increase  among 
its  deposits  on  the  other  side  of  the  balance  sheet. 
There  has  thus  been,  in  each  case,  an  increase  in 
deposits  through  the  operation  of  the  bank  in  lend- 
ing, discounting  or  investing.  If  we  can  imagine 
all  the  banks  suddenly  selling  all  their  investments 
and  bills  of  exchange  and  calling  in  all  their  ad- 
vances, the  process  could  only  be  brought  about  by 
the  cancelling  of  deposits,  their  own  and  one  an- 
other's. And  so  it  becomes  evident,  as  before 
stated,  that  the  deposits  of  the  banks  which  give  the 
commercial  community  the  right  to  draw  cheques 
are  chiefly  created  by  the  action  of  the  banks  them- 
selves in  lending,  discounting  and  investing. 

Since,  then,  it  thus  appears  that  credit  is  the 
machinery  by  which  a  very  important  part  of  mod- 
ern currency  is  created,  it  will  follow  that  it  should 
as  far  as  possible  be  chiefly  placed  at  the  disposal 
of  those  who  are  producing  goods,  or  are  going  to 
produce  goods,  because,  as  has  been  shown,  if  cur- 


J 


64  THE  BUSINESS  OF  FINANCE 

rency  is  created  more  rapidly  than  goods  are  pro- 
duced, the  result  is  a  rise  in  prices  which,  if  carried 
too  far,  is  likely  to  have  evil  effects.  It  is  the  busi- 
ness of  finance  to  try  to  maintain  something  like 
steadiness  in  prices  by  aiming  at  equilibrium  be- 
tween the  manufacture  of  currency  and  the  pro- 
duction of  goods.  There  are  nowadays  very  many 
schemes  for  making  mankind  rich  and  happy  by 
increasing  the  amount  of  money  in  its  pocket ;  and 
the  experiences  of  the  war,  in  which  governments 
with  the  assistance  of  their  bankers  have  greatly 
increased  the  supply  of  currency — and  so  have  made 
huge  expenditures  an  apparently  simple  matter — 
are  only  too  likely  to  tend  to  the  adoption  of  schemes 
of  this  kind  when  the  war  is  over,  and  all  kinds  of 
dangerous  short-cuts  may  be  tried  to  find  a  way 
through  the  difficult  problems  that  will  then  arise. 
All  who  are  interested  in  the  sanity  and  sense 
with  which  finance  is  conducted  will  have  to  do 
their  best  to  impress  on  those  whose  economic  edu- 
cation is  deficient  that  you  do  not  make  people  really 
any  better  off  by  plastering  the  world  with  paper 
promises  to  pay,  but  that  what  does  mankind  real 
good  is  stimulating  production  of  good  things 
to  put  into  its  stomach,  stout  clothes  for  it  to  wear, 
good  houses  for  it  to  live  in,  and  sound  education  to 
make  it  see  straight  in  matters  of  finance  and  in 
doing  its  duty  to  its  neighbour.  It  is  only  by  pro- 
ducing as  fast  as  possible  a  great  increase  in  the 
store  of  good  things  to  be  enjoyed  that  we  can  make 
humanity  better  off,  and  this  is  the  problem  to  which 


CREDIT  65 

finance  has  to  address  itself  and  never  to  lose  sight 
of  in  working  its  machinery.  Increased  production, 
with  an  improvement  in  distribution,  of  good  things 
to  make  people  healthy  and  contented  is  the  way  to 
a  better  world  on  the  material  side.  It  is  necessary 
to  insist  on  these  platitudes  because  producers  and 
merchants — especially  merchants — have  rather  a 
prejudice  towards  the  opposite  view.  The  thing 
that  they  are  most  terribly  afraid  of,  and  from  their 
own  point  of  view  with  good  reason,  is  the  possibility 
of  a  glut  of  goods — goods  in  their  warehouses  that 
they  cannot  sell  without  so  serious  a  reduction  in 
the  price  that  all  their  profit  is  gone,  and  that  the 
profits  of  prospective  producers  might  become  so 
problematical  that  production  would  be  checked. 
It  is  this  fear  of  glut  which  gives  such  an  uneasy 
feeling  to  merchants  and  producers,  which  is  just 
as  dangerous  as  the  opposite  tendency  to  inflation 
if  currency  is  manufactured  too  rapidly. 

The  cure  of  glut  is  obviously  to  be  found  through 
a  better  diffused  and  better  organised  buying  power 
on  the  part  of  humanity,  and  also  by  a  better  con- 
centration of  industry  upon  such  goods  as  would 
be  certain  of  a  market  whatever  may  happen  to 
changes  in  fashion.  Better  diffused  buying  power 
is  obviously  secured  most  simply  by  a  steady  rise  in 
wages  of  manual  workers  and  other  comparatively 
ill-paid  servants  of  society,  and  also  by  their  better 
education  concerning  the  things  that  may  be  bought 
out  of  their  surplus,  if  any.  At  present  industry, 
in  the  widest  sense  of  the  word,  devotes  much  of  its 


66  THE  BUSINESS  OF  FINANCE 

time,  energy  and  money,  which  it  afterwards  gets 
back  from  the  public,  to  forcing  upon  the  public 
goods  which  it  thinks  the  public  ought  to  want  just 
because  it  has  produced  them  and  wants  to  sell 
them. 

This  process  is  carried  out  by  the  enormously 
costly  system  of  advertisement,  circularising  and 
other  forms  of  touting  which  now  absorb  so  much 
of  the  energy  of  the  sellers  of  goods,  whose  services 
put  perhaps  as  much  into  the  ultimate  cost  of  the 
goods  as  all  those  of  the  original  producers  of  the 
raw  material  and  of  the  manufactured  article.  If 
we  could  only  train  mankind  to  know  exactly  what 
it  wants  to  buy  and  could  find  some  system  by  which 
it  would  notify  these  wants  in  advance,  the  economy 
in  production  from  the  elimination  of  the  advertiser 
would  be  enormous,  the  profit  of  the  real  producer 
would  be  increased,  while  the  price  to  the  ultimate 
buyer  could  be  reduced.  Industry  would  be  to  that 
extent  less  a  gamble  and  would  go  back  to  some- 
thing like  the  medieval  basis  when  each  man  ordered 
in  advance  the  goods  that  he  needed,  which  were 
then  manufactured  for  him  by  the  armourer,  or  the 
tailor,  or  the  shoemaker,  or  whoever  it  might  be, 
without  any  question  of  manufacturing  on  the 
chance  of  inducing  a  buyer  to  take  over  goods  by 
hiring  someone  to  force  them  down  his  throat.  I  do 
not  wish  to  be  understood  as  urging  that  we  should 
yeally  go  back  to  a  system  of  this  kind  in  all  its 
entirety,  but  if  we  could  aim,  by  means  of  co-opera- 
tive purchase,  education,  or  otherwise,  at  some  ays- 


CKEDIT  67 

tern  by  which  demand  would  be  more  reasonable 
and  more  certain,  the  whole  process  of  manufacture 
and  distribution  would  be  simplified  and  strength- 
ened, and  the  business  of  the  financier  would  be 
made  much  easier. 

If,  then,  fear  of  glut  is  a  constant  terror  in  the 
mind  of  the  merchant  and  the  producer,  this  does 
not  seem  to  be  a  sufficient  reason  against  taking 
all  measures  to  stimulate  as  far  as  possible  the 
production  of  goods,  since  it  has  been  shown  that 
it  is  only  by  the  production  of  goods  that  the  gen- 
eral welfare  of  mankind  can  be  increased  and  since 
the  machinery  of  finance  will  be  tested  by  this 
question,  whether  it  is  really  serving  the  general 
welfare  of  mankind.  There  cannot  be  a  real  glut 
of  goods  in  general  until  all  man's  material  wants 
are  satisfied.  Goods  are  made  to  be  exchanged  for 
goods,  and  as  long  as  their  production  remains 
fairly  level  the  terms  on  which  they  exchange  will  be 
fairly  level  and  they  will  absorb  one  another,  so  to 
Speak,  by  their  mutual  demand.  More  boots  pro- 
duced will  absorb  more  wheat  grown.  It  is  when 
industry  makes  lopsided  progress  and  the  output  of 
boots  grows  faster  than  that  of  wheat  that  glut 
arises. 

There  has  of  late  been  a  good  deal  of  question  in 
England  concerning  the  extent  to  which  the  bank- 
ing machinery  has  assisted  production,  and  it  has 
been  contended  that  more  efficient  machinery  might 
be  provided  for  this  purpose.  On  the  whole  it  seems 
to  me  that  these  criticisms  of  the  efficiency  of  bank- 


68  THE  BUSINESS  OF  FINANCE 

ing  in  this  country  largely  fell  flat.  It  was  certainly 
shown  that  there  was  room  for  machinery  for  doing 
things  which  banks  were  never  meant  to  do,  such  as 
the  examination,  nursing  and  preparation  of  finan- 
cial enterprises  of  more  or  less  doubtful  possibility 
which  might,  with  financial  assistance,  develop  into 
useful  industry.  It  is  not  the  business  of  banking 
to  take  risks  of  this  kind  in  view  of  the  great  lia- 
bility which  the  deposits  entrusted  to  them  by  the 
public  thrusts  upon  them.  There  certainly  was 
room  for  some  kind  of  financial  creche  in  which  in- 
teresting but  possibly  rickety  infants  might  have 
their  first  toddling  footsteps  guided,  and  on  this 
subject  and  on  the  whole  question  of  the  machinery 
for  company  promotion  there  will  be  more  to  be 
said  in  a  later  chapter.  It  is  the  business  of  the 
banks  to  do  all  that  they  can  in  their  power  to  assist 
production,  but,  at  the  same  time,  never  to  forget 
that  that  big  item  of  "Current  and  Deposit  Ac- 
counts" is  their  first  responsibility.  Nevertheless 
they  can  do  much,  by  the  bills  that  they  accept,  the 
bills  that  they  buy  and  the  loans  and  advances  that 
they  make,  to  regulate  the  machinery  of  finance  in 
such  a  way  that  production  shall  have  the  first  call 
upon  its  output,  that  is  to  say  of  the  currency  that 
it  creates  for  its  customers.  On  the  whole  there  can 
be  no  doubt  that  production  has  no  fair  charge  of 
neglect  to  lay  at  the  door  of  the  banking  machine. 
Nevertheless  there  is  no  harm  in  laying  stress  upon 
the  importance  to  the  banking  world  of  keeping  this 
object  always  in  view.    It  may  lead  to  misappre- 


CEEDIT  69 

hension  if  the  banks  are  thought  to  be  too  closely 
connected  with  the  machinery  of  stock  exchange 
speculation  and  the  machinery  of  speculation  in  the 
produce  markets.  If  ever  banking  is  called  upon  to 
render  an  account  of  its  stewardship,  it  can  do  so 
most  effectively  by  showing  that  it  has  used  its  great 
power  of  creating  currency  in  such  a  way  that  it 
has  been  devoted  chiefly  to  the  production  of  more 
goods  for  the  enjoyment  of  man,  and  that  the  equi- 
librium between  goods  and  currency,  which  a  former 
chapter  has  shown  to  be  desirable,  has  thereby  been 
furthered  or  secured. 


CHAPTER  IV 


CAPITAL 


In  the  minds  of  many  people  the  line  which 
divides  credit  from  capital  is  hazy.  This  is  largely 
owing  to  the  exasperating  habit  of  economic  and 
financial  jargon  which  constantly  insists  upon  talk- 
ing about  different  things  by  the  same  name.  Credit 
operations  are  often  spoken  of  as  including  all  the 
processes  carried  out  by  the  mechanism  of  finance. 
But  I  think  that  there  is  in  fact  a  very  real  dis- 
tinction between  credit  and  capital.  By  means  of 
credit,  as  was  shown  in  the  last  chapter,  borrowers 
are  supplied  by  the  machinery  of  finance  with  the 
right  to  draw  cheques,  or  to  handle  other  forms  of 
currency.  That  is  to  say,  by  means  of  credit  cur- 
rency is  manufactured  for  the  use  of  industry  and 
of  other  users  of  credit  by  the  financial  machine. 
There  is  an  essential  difference  between  this  process 
and  that  by  which  capital  is  placed  at  the  disposal 
of  industry.  We  may  put  it  shortly  by  saying  that 
the  machinery  of  credit  manufactures  currency  or 
buying  power ;  while  capital  hands  over  currency  or 
buying  power  to  industry.  The  creation  of  capital 
thus  implies  on  the  part  of  somebody  an  act  of 

70 


CAPITAL  71 

abstinence:  he  refrains  from  spending  money  on 
immediate  consumption  and  hands  it  over  to  some- 
body else  to  be  spent,  or  spends  it  himself,  on  some 
industrial  or  national  purpose.  This  is  the  sense 
in  which  capital  will  be  used  in  the  present  chapter 
and  throughout  this  book. 

But,  as  need  hardly  be  said,  capital  also  is  one 
of  the  terms  which  economic  and  financial  language 
has  exercised  its  highest  ingenuity  in  using  in 
different  senses.  One  of  the  earliest  descriptions  of 
capital  was  given  by  Turgot,  the  French  practical 
economist,  who  defined  it  as  "valeurs  accumuMes.'' 
In  this  sense  of  course  it  applies  practically  to  all 
forms  of  what  is  commonly  called  wealth :  that  is  to 
say,  all  accumulated  property  which  has  an  ex- 
change value,  that  is,  can  be  sold  at  a  price.  In  this 
sense  capital  would  include  houses,  clothes,  furni 
ture,  books :  all  the  instruments  and  machinery  of 
comfort  and  enjoyment.  In  one  sense  the  pearl 
necklace  worn  by  the  millionaire's  wife  is  certainly 
capital:  it  is  an  investment  which  returns  no  in- 
terest, but  it  grows  in  value,  sometimes,  and  it  can, 
if  anything  goes  wrong  with  the  millionaire's  enter- 
prises, be  turned  into  goods  on  which  he  and  she  can 
live. 

Nevertheless,  in  ordinary  business  language  cap- 
ital is  used  in  a  narrower,  and  it  seems  to  me  in  a 
truer,  sense  in  which  it  has  also  received  theoretical 
economic  endorsement  from  John  Stuart  Mill  and 
others.  This  is  in  the  sense  of  wealth  applied  to  the 
production  of  further  wealth ;  in  other  words,  capi- 


72  THE  BUSINESS  OF  FINANCE 

tal  covers  the  tools  and  equipment  of  industry  in  the 
widest  sense  of  the  word,  including  agriculture  and 
transport.  This  equipment  of  industry  can  only  be 
produced,  maintained  and  increased  if  tlie  com- 
munity, or  a  certain  number  of  members  of  it,  re- 
frain from  immediate  consumption  and  enjoyment, 
and  place  the  labour  and  energy,  which  they  would 
otherwise  have  employed  for  their  own  gratifica- 
tion, at  the  disposal  of  industry  for  its  equipment. 
If  we  take  a  concrete  example :  a  man  who  spends 
£1,000  on  a  banquet  to  his  friends  consumes  that 
amount  at  once  in  the  pleasure  of  hospitality  or  the 
joy  of  ostentation.  If  he  spends  the  same  amount 
on  gewgaws  for  his  wife,  the  consumption  is  not 
immediate,  the  jewels  are  a  permanent  addition  to 
her  armoury  of  decoration,  and  can  be  turned  into 
more  practically  useful  goods  at  any  time,  if  neces- 
sary. But  if  he  puts  £1,000  into  an  investment — a 
factory  or  a  railway,  or  a  land  company — he  is  in- 
creasing the  productive  power  of  the  world  by  help- 
ing to  make  and  grow  the  things  that  mankind 
wants,  or  carrying  them  from  the  place  they  are 
made  to  the  place  at  which  they  are  wanted.  In 
other  words,  instead  of  spending  his  money  he  has 
saved  it,  and  so  provided  capital  for  the  equivalent 
of  industry ;  for  it  is  only  by  saving  that  capital  can 
be  provided. 

The  responsibility  of  finance  with  regard  to  capi- 
tal is  thus  greater  and  less  than  in  the  provision  of 
currency  and  credit.  Finance  does  not  manufac- 
ture capital,  as:  it  does  currency  and  credit,  and  con- 


CAPITAL  73 

sequently  its  responsibility  is  to  that  extent  less 
direct.    What  it  does  is  to  gather  the  savings  of  the 
public  and  provide  the  public  with  investments  for 
the  money  that  it  saves.    From  this  point  of  view 
its  responsibility  is  immense.     As  long  as  it  is 
manufacturing  currency  and  credit  it  is  dealing, 
as  a  rule,  with  business  experts  who  know  exactly 
what  they  are  doing  when  they  ask  their  bankers 
for  an  overdraft  or  an  acceptance,  and  are  just  as 
well  aware  of  all  the  rules  of  the  game  as  is  the 
banker  or  the  financier.    But  the  public,  on  all  sub- 
jects connected  with  money  matters,  is  so  abysmally 
ignorant  that  its  monetary  knowledge  may  be  said 
to  be  a  minus  quantity.    A  pamphlet  recently  re- 
ceived from  the  United  States  quotes  Mr.  Vanderlip 
of  the  National  City  Bank  of  New  York  as  having 
described  the  Americans  as  a  "nation  of  economic 
illiterates."     If  this  be  true  of  America  it  is  per- 
haps even  truer  of  England,  and  indeed  of  all  coun- 
tries in  which  economic  civilisation  is  said  to  have 
made  any  progress.  In  this  direction,  in  fact,  prog- 
ress cannot  be  said  to  have  begun,  and  the  ideas 
of  the  public  concerning  the  use  that  it  ought  to 
make  of  its  money  and  the  kind  of  investments  that 
the  financial  machinery  ought  to  provide  it  with, 
with  a  mouth-filling  rate  of  interest,  a  certainty  of 
capital  appreciating  and  no  risk  whatever,  are  a 
continual  cause  of  great  loss  to  the  public.    These 
ideas  also  produce  a  crop  of  swindlers  in  the  byways 
of  back-street  finance,  and  a  consequent  oscillation 
on  the  part  of  the  public  between  a  blind  belief  in  its 


74  THE  BUSINESS  OF  FINANCE 

power  to  make  a  fortune  without  any  trouble  in  the 
purlieus  of  the  Stock  Exchange,  and  an  equally 
stupid  conviction  that  the  whole  financial  centre  is 
tenanted  by  a  gang  of  swindlers  and  that  every 
company  promoted  is  as  likely  as  not  to  be  a  fraud. 
As  long  as  these  hallucinations  are  general  it  can- 
not be  expected  that  the  machinery  by  which  capital 
is  provided  for  industry  by  the  public  can  work 
smoothly  or  happily.  It  is  said  that  bitter  experi- 
ence is  teaching  the  public  many  important  lessons, 
but  every  year  there  seems  to  come  forward  a  fresh 
crop  of  people  nursing  all  the  familiar  fallacies. 

From  one  point  of  view  it  is  certainly  the  public^s 
own  fault  if  it  is  fool  enough  to  expect  impossi- 
bilities, and  consequently,  owing  to  its  own  greed 
and  gullibility,  puts  itself  at  the  mercy  of  financial 
sharks.  The  ultimate  solution  of  the  problem  lies 
no  doubt  in  better  education  of  the  public,  which 
will  teach  every  man  that  the  machinery  of  finance 
does  not  exist  to  enable  him  to  get  rich  quick  by 
some  lucky  stroke  of  fortune,  but  to  provide  him 
with  sound  investments  into  which  he  can  put  his 
money  in  the  expectation  of  a  reasonable  return  on 
it.  In  this  matter,  as  in  all  others,  the  production 
of  a  better  individual  is  the  only  way  to  the  im- 
provement of  the  social  average.  But  at  the  same 
time  much  can  be  done  by  finance  in  purging  its 
byways  and  back-streets  and  arranging  some  sys- 
tem of  signposts  by  which  the  investor,  the  real 
investor,  if  there  is  such  a  person,  can  find  his  way 
to  what  he  wants.    Nearly  all  people  who  believe 


CAPITAL  75 

themselves  to  be  investors  are,  as  a  matter  of  fact, 
gamblers,  whose  real  desire  is  to  make  money  with- 
out any  trouble.  For  people  of  that  kind  the  only 
medicine  is  the  loss  which  their  own  failure  to 
think  clearly  probably  brings  upon  them.  But  the 
distinction  between  investment  and  speculation  can 
be  made  clearer  and  should  be  made  clearer,  and 
it  ought  not  to  be  possible  for  any  investor  who 
really  wants  an  investment,  to  take  the  wrong  path 
because  he  is  actually  misled  and  is  provided  with 
a  speculation  against  his  own  desire. 

The  responsibility  of  finance  with  regard  to  the 
arrangements  by  which  capital  is  collected  and 
invested  is  all  the  greater  in  these  times,  and  is 
likely  to  become  greater  still  during  the  difl&cult 
period  after  the  war,  because  capital  has  for  many 
years  been  criticised  and  abused  by  many  well- 
meaning  people  who  do  not  quite  know  what  it 
means :  and  during  the  war  these  attacks  upon  capi- 
tal have  been  growing  in  intensity  and  bitterness 
and  are  very  likely  to  increase  in  acerbity  and 
severity.  Suspicions  concerning  capital  and  capi- 
talists have  been  nourished  during  the  war,  largely 
owing  to  the  slackness  with  which  the  war  has  been 
financed  by  the  Governments  of  the  various  nations 
engaged  in  the  struggle.  If  this  war  will  go  down 
to  history  as  the  greatest  and  most  momentous  that 
ever  has  been  fought,  it  will  also  be  celebrated  as 
the  one  which,  in  spite  of  great  accumulation  of 
financial  experience  of  the  previous  century,  has 
been  the  worst  financed  in  the  history  of  finance.  It 


76  THE  BUSINESS  OF  FINANCE 

is  fashionable  to  argue  that  everything  bad  con- 
nected with  the  war  is  the  fault  of  Germany,  and  I 
think  this  is  really  true  about  the  bad  finance  which 
has  marked  its  course.  Germany  began  the  war 
with  the  belief  that  it  was  going  to  be  paid  for,  as 
far  as  she  was  concerned,  out  of  indemnities  im- 
posed upon  the  peoples  w^hom  she  meant  to  con- 
quer. Consequently  for  a  long  time  she  raised  no 
fresh  taxation  whatever,  and  in  fact  reduced  it,  and 
even  when  she  began  to  tax  she  did  not  attempt  to 
raise  enough  by  taxation  to  cover  even  the  interest 
on  the  war  debt,  to  say  nothing  of  any  contribution 
to  the  actual  cost  of  war.  Consequently  the  other 
powers,  when  they  dealt  timorously  with  their  citi- 
zens in  the  matter  of  taxation,  were  able  to  point  to 
the  example  of  Germany,  to  slap  themselves  on  the 
back,  and  to  thank  God  that  they  were  not  as  any 
German  publican.  England,  w^hich  during  the  first 
three  years  of  the  war  did  much  better  than  any 
other  powder  in  this  respect  to  meet  war's  cost  out 
of  taxation,  had  at  the  end  of  the  period  paid  less 
than  20%  of  the  war's  cost  out  of  taxation.  This 
compares  with  47%  in  the  Napoleonic  and  Crimean 
wars.  Consequently  four-fifths  of  the  cost  of  the 
war  had  to  be  raised  by  borrowing  or  by  the  manu- 
facture of  currency,  resulting  in  the  process  of  in- 
flation. It  was  argued  that  this  course  was  perfectly 
just  and  fair  because  posterity  will  benefit  from  the 
establishment  of  a  "world  safe  for  democracy,"  as 
President  Wilson  has  well  expressed  it,  and  that 
consequently  posterity  ought  to  pay  a  large  part  of 


CAPITAL  77 

the  bill.  This  notion,  that  posterity  can  be  made  to 
pay,  is  largely  a  delusion,  since  posterity  will  con- 
sume whatever  it  produces ;  and  by  leaving  this  enor- 
mous mass  of  debt  outstanding  in  consequence  of 
the  war.  we  can  merely  affect  the  distribution  of  the 
wealth  that  posterity  creates,  and  not  its  amount. 
If  a  nation  borrows  abroad,  then  its  posterity  will 
pay  the  posterity  of  its  foreign  creditors;  but  by 
no  ingenuity  can  we  make  posterity  pay  anything 
to  us. 

In  the  meantime,  however,  the  general  public  is 
obsessed  by  another  and  very  natural  delusion, 
which  makes  it  believe  that  the  rich  are  growing 
richer  by  subscribing  to  these  enormous  war  loans, 
and  that  the  great  masses  of  Government  securi- 
ties created  are  an  addition  to  the  wealth  of  the  in- 
vesting classes.  In  fact,  since  it  is  the  investing 
classes  on  whom  the  chief  burden  of  taxation  must 
necessarily  fall,  because  the  imposition  of  heavy 
taxation  on  those  who  are  living  on  the  margin  of 
subsistence  impairs  their  efficiency  as  citizens  and 
so  is  an  economic  mistake,  it  therefore  follows  that 
the  rich,  when  they  subscribe  these  enormous  sums 
to  pay  for  the  war,  are  in  fact  purchasing  pledges 
which  bind  them  to  pay  themselves  interest  and  to 
redeem  the  promises  to  pay  that  they  will  hold.  If 
the  warring  governments  had  taken  a  bolder  line, 
had  put  the  facts  of  war  finance  more  clearly  before 
the  investing  public,  the  investing  public  would 
have  seen  that  it  would  have  been  cleaner  finance, 
and  in  their  own  interests  and  those  of  the  industry 


78  THE  BUSINESS  OF  FINANCE 

of  the  country,  to  pay  a  much  larger  proportion  of 
the  war's  cost  out  of  taxation,  and  there  would  have 
been  much  less  friction  and  suspicion  on  the  part 
of  what  are  called  the  working  classes,  who  would 
no  longer  have  believed  that  the  rich  were  growing 
still  richer  out  of  the  war,  while  they  themselves 
were  being  exploited  by  employers,  swindled  by 
profiteers,  and  induced  to  work  longer  hours  under 
extremely  exacting  conditions  for  higher  wages,  the 
benefit  of  which  was  taken  away  from  them  by 
higher  prices.  This  mischief  has  gone  so  far  that 
these  cases  of  suspicion  and  unrest  were  given 
prominence  by  reports  produced  by  a  Commission 
enquiring  into  industrial  unrest,  appointed  towards 
the  end  of  the  third  year  of  the  war  to  discover 
what  was  wrong  in  England  with  the  feelings  of  the 
working  classes.  The  subjoined  extracts  are  taken 
from  the  Report  of  the  Commissioners  for  the  South- 
western Area.  One  of  these  Commissioners  was 
Sir  Alfred  Booth,  the  Chairman  of  the  Cunard 
Company,  a  practical  and  successful  captain  of  in- 
dustry, whose  opinion  cannot  be  thought  to  be 
tainted  by  any  of  the  dogmas  of  the  economic  theor- 
ist. 

'^Increase  in  Food  Prices — The  one  outstanding 
cause  of  unrest  which  we  found  everywhere  is  the 
high  cost  of  living,  especially  with  regard  to  food. 
This  is  accompanied  by  complaints  of  exploitation, 
profiteering,  and  bad  distribution. 

^^High  Prices  of  Foodstuffs — The  initial  cause  of 
the  rise  in  prices  was  the  financial  policy  of  the 


CAPITAL  79 

Government,  which  has  relied  too  much  on  loans — 
largely  credit  loans — and  too  little  on  taxation  de- 
signed to  check  unnecessary  consumption.  The  re- 
sult has  been  a  great  inflation  of  credit  followed  by 
a  very  serious  inflation  of  the  currency.  So  long 
as  the  present  financial  policy  is  continued  prices 
will  continue  to  rise.  It  is  admitted  that  income 
tax  and  super  tax  could  not  be  substantially 
raised  in  general,  or  even  more  steeply  graded,  with- 
out a  comprehensive  reform  with  regard  to  the 
treatment  of  family  incomes.  The  problem  will  in 
any  case  have  to  be  faced  after  the  conclusion  of 
peace,  and  it  should  be  tackled  now  in  order  to  re- 
duce our  dependence  on  further  inflation  as  a  means 
of  financing  the  war. 

^^ Extravagance^  Taxation  and  Forced  Loans — Our 
attention  was  called  to  the  contrast  between  the 
man  who  is  compelled  to  serve  as  a  soldier  and  the 
man  who  voluntarily  lends  to  the  Government.  It 
was  tersely  put  to  us  that  the  soldier  is  compelled 
to  serve  at  one  shilling  a  day,  while  the  man  with 
money  voluntarily  lends  to  the  Government  at  5 
per  cent.  This,  it  was  pointed  out,  is  irritating  and 
unjust.  Another  cause  of  irritation  is  the  apparent 
luxury  and  ostentatious  display  of  wealth. 

"It  is  evident  that  after  an  experience  of  nearly 
three  years  many  persons  will  not  curb  their  ex- 
travagance and  show  of  luxury. 

"In  order  to  remove  the  sense  of  irritation  among 
workers  and  to  assist  the  national  exchequer  all 
unnecessary  expenditure  of  the  individual  ought  to 
be  checked,  and  this  can  only  be  done  by  taxation 
or  by  forced  loans." 

Such  is  ihQ  state  of  mind  on  the  subject  of  capital 
and  the  capitalist  engendered  by  bad  financing  on 


80  THE  BUSINESS  OF  FINANCE 

the  part  of  the  warring  governments  during  the 
course  of  the  war.  What  sort  of  crop  the  sowing  of 
these  economic  tares  will  produce  later  on  time 
will  show.  In  the  meantime  it  is  the  business  of 
finance,  the  prosperity  and  activity  of  which  is  so 
closely  connected  with  the  same  views  on  the  sub- 
ject of  capital,  to  furbish  up  its  armour  in  this  re- 
spect and  to  be  ready  with  an  answer  when  the 
enemies  of  capital,  greatly  reinforced  by  what  has 
happened  during  the  war,  range  themselves  for 
frontal  attack  when  it  is  over.  In  other  words,  we 
have  to  be  ready  to  show  how  capital  earns  its 
reward. 

It  has  already  been  shown  that  capital  is  wealth 
set  aside  for  the  production  of  wealth.  This  is  the 
economic  explanation  of  the  matter.  Somebody 
who  by  working  or  otherwise  has  acquired  wealth, 
instead  of  consuming  it  on  his  own  enjoyment,  puts 
it  into  the  equipment  of  industry.  But  since,  from 
the  point  of  view  of  the  ordinary  man,  capital  is 
usually  regarded  as  money  invested,  and  since  this 
is  what  actually  happens  in  practical  fact,  it  is  per- 
haps better  to  regard  capital  as  so  much  capital 
invested,  thus  carrying  the  economic  analysis  a  step 
further.  Anybody  who  earns  nowadays  is  paid  in 
the  form  of  money ;  he  has  that  money  in  his  pocket 
or  at  his  bank  or  in  a  drawer  in  his  desk.  He  can 
use  it  if  he  pleases  for  indulgence  in  amusement, 
or  he  can  use  it  as  provision  against  a  rainy  day, 
or  for  his  dependents.  If  he  takes  this  latter  course 
he  is  a  saver  and  consequently  is  likely  to  be  despised 


CAPITAL  81 

by  his  fellows,  who  generally  regard  the  man  who 
saves  as  a  certainly  timorous,  and  probably  mean, 
person,  while  the  open-handed  cheerful  person  who 
takes  all  the  risks  of  life  with  a  light  heart  and 
spends  all  that  he  gets  with  open-handed  generosity 
is  universally  regarded  as  a  much  pleasanter  per- 
son to  meet  and  a  far  more  satisfactory  member  of 
society.  He  is  said  to  be  giving  employment,  which 
he  certainly  is — it  is  practically  impossible  to  spend 
money  without  doing  so.  If  he  spends  money  on 
keeping  a  well-equipped  yacht,  he  employs  the  serv- 
ices of  those  who  build  the  yacht,  and  dig  and 
transport  the  coal  for  its  propulsion,  and  the  serv- 
ices of  the  crew  and  of  all  who  cater  for  the  ex- 
pensive equipment  of  this  attractive  form  of  pleas- 
ure. But  all  this  employment  which  he  gives  merely 
contributes  to  the  immediate  enjoyment  of  himself 
and  his  friends,  and  does  not  increase  the  produc- 
tive power  of  the  world.  Spending  on  pleasure  and 
amusement  is  surely  an  excellent  thing  to  do  within 
limits.  This  is  no  sermon  on  the  subject  of  ascetic 
self-denial  which  would  leave  all  enjoyment  out  of 
the  world.  All  that  I  am  trying  to  show  is  that 
if  everybody  spent  all  their  money  upon  enjoyment 
of  this  kind  there  would  be  no  money  available  for 
investment,  consequently  it  would  be  impossible  to 
build  a  new  factory,  lay  out  a  new  railway,  break 
a  new  sod  in  unreclaimed  earth.  There  could  be 
no  increase  in  the  demand  for  labour  and  the  fur- 
ther development  of  industry  would  stop.  The 
service  of  the  mean  and  timorous  person  who  saves 


82  THE  BUSINESS  OF  FINANCE 

is  such  that  industry  could  not  get  on  without  it. 

Capital  has  been  compared  to  the  seed  corn  used 
by  the  farmer.  If  all  the  farmers  consumed  them- 
selves, or  sold  in  order  to  provide  themselves  with 
other  objects  of  consumption,  all  the  corn  that  they 
grew,  keeping  none  to  be  sown  for  next  year's  har- 
vest, there  would  be  no  corn  grown  next  year.  If  all 
those  who  receive  money,  that  is  to  say,  buying 
power,  spent  it  all  upon  luxury  and  enjoyment, 
industry  would  cease  just  as  certainly  as  corn- 
growing  would  cease  if  all  the  corn  were  consumed. 
So  that  when  reformers  of  society  maintain  that 
capital  and  the  possession  of  capital  are  a  device  for 
exploiting  the  worker,  taking  a  share  of  the  product 
of  industry  to  which  they  have  no  claim  in  justice, 
the  answer  is  obvious,  that  if  there  were  no  capital 
there  could  be  no  industry,  and  that  the  man  who 
saves  earns  his  reward  in  the  shape  of  interest  or 
profit  upon  his  investments  by  being  the  driving 
wheel  which  sets  all  the  machinery  of  industry  to 
work. 

Nevertheless,  there  remains  the  difficult  fact  of 
the  hereditary  capitalist;  the  man  who  has  not 
saved  himself,  but  has  inherited  from  a  father  or 
relative  or  friend  a  fortune  which  may  enable  him 
to  exercise  an  enormous  power  over  the  product 
of  industry  without  ever  having  done  a  stroke  of 
work  in  his  life.  The  unfairness  of  this  arrange- 
ment is  at  once  evident,  and  there  is  little  need  to 
dwell  on  the  disadvantages  that  it  entails,  not  only 
upon  all  those  whose  industry  is  subject  to  the 


CAPITAL  83 

charge  exercised  by  such  a  holder,  but  also  upon 
the  holder  himself,  who  is  much  too  likely  to  re- 
gard the  world  as  a  place  in  which  he  is  only  meant 
to  enjoy  himself,  with  the  result  that  he  finds  it 
extremely  difficult  to  do  so.  But  when  all  this  is 
admitted,  one  has  also  to  acknowledge  that  there  is 
a  great  deal  of  justice,  and  still  more  expediency, 
on  the  side  of  the  institution  of  hereditary  prop- 
erty. If  we  go  back  to  the  case  of  the  farmer  and 
his  seed  corn,  and  if  we  imagine  that  all  the  farmers 
in  a  community  except  one  were  to  consume,  direct- 
ly or  indirectly,  all  the  corn  that  they  grew,  the  one 
who  had  kept  a  store  to  be  sold  to  produce  next 
year's  harvest,  would,  by  every  law  of  justice,  be 
entitled  to  a  reward  for  his  foresight  expressed  in 
the  price  at  which  he  sold  or  lent  some  of  his  seed 
corn  to  his  less  provident  brethren.  If  this  farmer 
were  to  die,  leaving  his  seed  corn  to  his  son,  there 
is  much  to  be  said  for  the  contention  that  it  would 
be  very  unfair  to  him  that  the  son  should  not  ben- 
efit by  his  provident  action.  And  it  would  be  the 
same  thing,  if  instead  of  leaving  it  to  his  son,  he 
left  It  to  a  nephew  or  a  friend. 

A  man's  power  to  pass  on  the  fruits  of  his  labour 
to  those  whom  he  leaves  behind,  is  surely  a  very 
reasonable  reward.  If  it  is  not  granted,  as  things 
are,  one  of  the  strongest  inducements  to  work  would 
be  taken  away  from  the  greater  part  of  working 
mankind.  Those  who  own  the  wealth  and  capital 
of  the  world  are  in  the  main  representatives  of 
those  who  by  their  work  and  enterprise  have  made 


84  THE  BUSINESS  OF  FINANCE 

industrial  progress  possible  in  the  past.  If  it  had 
not  been  for  the  work  and  enterprise  of  those  whom 
they  represent,  the  world  would  have  been  a  much 
poorer  place,  turning  out  much  less  stuff  for  the 
sustenance  and  enjoyment  of  mankind,  and  conse- 
quently with  a  much  smaller  population  able  to 
enjoy  the  pleasures  of  existence. 

It  is,  however,  true  that  Governments  have  to  see 
to  it  that  those  who  acquire  this  power  from  their 
own  work  or  from  their  thrifty  and  hard-working 
ancestors  should  not  abuse  it.  Horrible  results 
have  been  produced  in  the  past  by  the  abuse  of 
their  power  by  capitalists. 

Less  than  a  century  ago  it  was  quite  usual  for 
children  of  tender  years  to  be  worked  in  factories 
and  workshops  under  conditions  which  now  make 
us  shudder  to  read  of  them.  A  number  of  examples 
will  be  found  in  the  chapter  on  the  employment  of 
children  in  a  book  called  "The  Town  Labourer-' 
lately  published.*    We  quote  from  page  175.  .  .  . 

"It  was  reported  that  there  was  much  more  cru- 
elty in  the  Halifax  pits  than  in  those  at  Leeds  and 
Bradford.  A  sub-commissioner  met  a  boy  crying 
and  bleeding  from  a  wound  in  the  cheek,  and  his 
master  explained:  *that  the  child  was  one  of  the 
slow  ones,  who  would  only  move  when  he  saw  blood, 
and  that  by  throwing  a  piece  of  coal  at  him  for  that 
purpose  he  had  accomplished  his  object,  and  that  he 
often  adopted  the  like  means.'  The  witnesses  ex- 
amined by  a  Factory  Commissioner  at  Worsley  near 

*By  J.  L.  Hammond  and  Barbara  Hammond  (Longmans 
Green  &  Co.) 


CAPITAL  85 

Manchester  in  1833,  said  that  'purring,'  which  was 
Lancashire  for  kicking,  was  a  common  way  of  pun- 
ishing boys  and  girls  in  the  mines  there.  The  Com- 
missioners of  1842  found  that  the  coal-owners  took 
very  little  interest  in  the  children  employed  in  their 
mines  after  their  daily  work  was  over,  and  it  is  cer- 
tainly not  difficult  to  believe  this,  seeing  that  when 
Lord  Melbourne  was  Prime  Minister,  and  delight- 
ing England  by  his  graceful  friendship  with  the 
young  queen,  the  children  were  w^orking  in  his 
mines  from  6  o'clock  in  the  morning  to  8  o'clock 
at  night.  In  Lord  Balcarres's  pits  at  Aspall  Moor 
the  children  worked  from  5  A.  M.  to  6  P.  M._,  and 
some  of  them  were  workhouse  apprentices.  The 
conditions  seemed  scandalous  enongh  to  the  Com- 
mission in  1842,  but  in  some  respects,  at  any  rate, 
the  children  were  worse  off  twenty  years  earlier. 
Thus  one  witness  said  that  when  he  began  to  work, 
at  eight  years  old,  as  doorkeeper  in  Felling  Pit  in 
1798,  he  used  to  be  eighteen  or  twenty  hours  down 
the  pit  without  coming  up.  Another  witness,  an 
underviewer,  said  that  thirty-five  years  back  the 
boys  used  to  work  from  2  A.  M.  to  8  or  9  P.  M. 
Another  witness  described  the  life  of  a  pit-boy 
fifty  years  earlier.  The  boys  began  at  six  to  eight 
years  old,  as  trappers,  and  were  paid  fivepence  a 
day.  From  twelve  or  fourteen  to  seventeen  or  eigh- 
teen they  worked  as  putters  or  drivers,  being  har- 
nessed two  together  to  drag  their  heavy  loads. 
Their  hours  were  from  2  a.  m.  to  8  or  9  P.  M.  every 
day  except  Saturday.  In  busy  times  they  never 
saw  the  daylight  from  Sunday  to  Saturday  after- 
noon. 

"The  Commissioners  reported  in  1842,  speaking  of 
the  worst  practices  in  the  West  Riding,  that  the 
proprietors  disclaimed  all  responsibility  and  con- 


86  THE  BUSINESS  OF  FINANCE 

cern.  It  is  difficult  to  imagine  that  the  proprietors 
anywhere  else  were  more  sensitive.  They  included 
men  of  great  power  and  influence,  men  like  Lord 
Londonderry,  Lord  Durham,  Lord  Melbourne,  Lord 
Granville.  These  noblemen  did  not  wash  their 
hands  of  the  business  that  made  their  w^ealth,  for 
they  took  an  active  part  in  putting  down  strikes  and 
crushing  Trade  Unions.  They  differed  on  many 
questions,  but  on  those  questions  they  were  in  agree- 
ment. Lord  Melbourne  made  it  pretty  clear  in  1832 
that  he  would  have  liked  to  re-enact  the  old  Com- 
bination Law,  in  order  to  deal  with  the  Miners' 
Unions.  But  not  one  of  them  seems  ever  to  have 
opened  his  mouth  on  the  subject  of  the  slave  chil- 
dren in  their  mines,  or  supposed  that  they  were  un- 
der the  slightest  obligations  to  the  society  that  gave 
them  their  wealth  and  power." 

It  seems  astonishing  now  that  such  things  should 
have  happened  in  a  community  which  believed  it- 
self to  be  highly  civilised.  The  fact  that  they  did 
happen  and  that  we  now  regard  them  as  impossible 
is,  from  one  point  of  view,  a  cheering  evidence  of 
the  improvement  in  human  sentiment  on  the  sub- 
ject of  the  treatment  of  labour  that  has  taken  place 
since  then.  It  should,  however,  be  a  perpetual 
reminder  to  us  not  to  be  too  sure  that  the  opinions 
which  we  cherish  now  and  the  acts  which  public 
opinion  permits  may  not  seem,  less  than  a  century 
hence,  to  be  just  as  impossible  and  incredible  to  our 
more  enlightened  descendants.  We  have  no  reason 
to  suppose  that  the  distinguished  gentlemen  who 
are  mentioned  in  the  extract  given  above  as  having 


CAPITAL  87 

permitted  things  to  be  done  on  their  property  and 
for  their  enrichment  which  we  should  now  regard 
as  barbarous  cruelty,  were  in  fact  one  whit  less 
humane,  sympathetic  and  large-minded  than  any 
of  us.  They  looked  at  things  from  a  different  point 
of  view  and  would  probably  have  been  horrified  if 
it  had  been  suggested  to  them  that  they  were  doing 
anything  inhuman.  The  reasons  for  this  attitude 
of  theirs  and  for  the  change  which  has  since  come 
over  men's  views  about  these  matters  are  interesting 
to  consider. 

In  the  first  half  of  the  nineteenth  century  public 
opinion  was  strongly  under  the  influence  of  the 
view,  first  put  forward  by  Adam  Smith  in  his  great 
attack  upon  Government  interference  with  indus- 
try, that  the  obvious  and  simple  system  of  national 
liberty  is  the  one  thing  by  which  the  interests  of  all 
parties  in  an  industrial  community  are  secured. 
It  must  always  be  remembered  that  Adam  SmitH 
wrote  before  the  industrial  revolution  had  taken 
place,  and  from  many  passages  in  his  immortal 
work  it  is  clear  that  his  sympathy  with  the  interests 
of  the  labourers  was  such  that  he  would  have  been 
the  first  to  protest  against  the  extreme  interpreta- 
tion that  was  put  by  his  successors  upon  his  own 
doctrine.  Nevertheless  he  seems  to  have  held  the 
view  that  wages  were  necessarily  always  on  a  level 
which  would  barely  maintain  the  labourer  and  his 
family  alive  and  able  to  work.  This  is  shown  by 
the  well-known  passage  in  which  he  points  out  that 
indirect    taxation    applied    to   necessary    articles 


8S  THE  BUSINESS  OF  FINANCE 

which  the  labourers  must  consume  is  necessarily 
paid  finally  by  their  employers,  because  the  wages 
of  labour  are  inevitably  such  that  the  labourer  could 
not  afford  to  pay  it  himself.  This  pessimistic 
doctrine  had  been  still  further  established  by  the 
work  of  Malthus,  in  which  he  had  demonstrated  to 
his  own  satisfaction  and  that  of  the  public  which 
he  enormously  impressed,  that  any  increase  in  the 
wages  of  labourers  merely  leads  to  a  more  rapid 
propagation  on  their  part  which  necessarily  re- 
duces their  position  again  to  a  place  on  the  margin 
of  starvation.  Thus  misled  by  their  theoretical 
instructors,  it  is  not  surprising  to  find  the  most  hu- 
mane and  enlightened  employers  convinced  that 
any  attempts  that  they  made  to  better  the  lot  of 
those  who  worked  for  them  were  certain  to  be 
defeated  by  economic  laws  over  which  they  had 
no  control.  Subsequent  experience  has  proved  that 
these  theories  were  delusions;  that  it  is  possible 
for  the  wage  earners  to  attain  to  a  condition  of  life 
which  is  well  above  subsistence  level,  and  that  the 
Malthusian  doctrine  is  so  far  incorrect  that  the 
greater  the  control  that  is  acquired  over  the  neces- 
saries and  comforts  of  life,  the  stronger  the  tend- 
ency becomes  not  to  propagate  up  to  the  margin  of 
subsistence,  but  to  reduce  the  rate  of  increase  in  the 
population. 

It  was  necessary  to  look  back  over  this  dingy 
period  in  which  economic  delusions  had  such  dis- 
astrous social  effects,  because  those  effects  are  with 
us  to-day,  and  are  still  part  of  the  background  of 


CAPITAL  -  89 

the  working  class  mind  which  has  to  be  allowed  for 
by  everyone  who  has  any  control  over,  or  connec- 
tion with,  the  management  of  capital.  The  nine- 
teenth century  delusions  erred  on  one  side  in  favour 
of  optimism,  in  the  belief  that  if  everybody  was 
left  to  seek  his  own  interests  the  best  interests  of 
the  community  would  by  some  pleasant  miracle 
somehow  emerge,  and  on  the  other  hand  went  to 
the  extreme  of  pessimism  by  maintaining  the  view 
that  no  efforts  to  improve  the  lot  of  the  working 
classes  could  possibly  have  any  practical  result. 

We  now  know  that  this  optimistic  view  could 
only  have  been  true  in  a  community  in  which  every- 
body was  educated  to  a  very  high  degree  of  eco- 
nomic perception  and  was  also  gifted  with  an  un- 
usual range  of  knowledge  and  discernment  concern- 
ing the  true  meaning  of  their  own  interests  and 
those  of  the  community.  And  it  has  been  found 
necessary  that  the  Government  should  intervene 
constantly  on  the  side  of  those  who,  being  half- 
educated  or  not  educated  at  all,  and  also  having 
no  material  resources  to  fall  back  upon,  are  neces- 
sarily the  weaker  parties  in  the  industrial  bargain. 
Given  this  protection  by  the  Government,  which 
is  necessitated  in  the  economic  interests  of  the 
community,  the  present  system  of  the  control  of 
the  equipment  of  industry  by  means  of  privately 
owned  capital  seems  on  the  whole  to  be  the  most 
workable  system,  in  spite  of  its  obvious  draw- 
backs. The  only  alternative  to  it  is  the  control 
and  ownership  of  the  capital  by  the  State  or  munic- 


90  THE  BUSINESS  OF  FINANCE 

ipality  or  some  other  form  of  collective  ownership. 
It  is  commonly  supposed  that  if  this  system  were 
established,  the  wages  at  present  paid  to  capital 
would  be  saved  by  the  community.  This  is  a  com- 
plete misapprehension :  capital  would  still  have  to 
be  saved  and  its  price  would  still  have  to  be  paid. 
The  difference  would  be  that  instead  of  capital 
being  saved  by  certain  members  of  the  community, 
it  would  have  to  be  saved  by  the  community  as  a 
>vhole,  which  could  only  do  so  by  either  taxing  the 
whole  community  in  order  to  provide  the  necessary 
capital,  or,  if  it  abandoned  all  monetary  arrange- 
ments, by  compelling  certain  members  of  the  com- 
munity to  do  the  necessary  work  in  increasing  and 
maintaining  the  equipment  of  industry  which  is 
now  paid  for  by  the  private  capitalist.  Under  a 
collectivist  system,  just  as  much  as  under  private 
controlled  property  and  capital,  fresh  capital  could 
only  be  found  if  a  certain  amount  of  work  were 
put,  year-in  and  year-out,  into  the  necessary  indus- 
trial equipment.  And  that  work,  which  represents 
the  price  of  capital,  would  have  to  be  done,  as  now, 
by  somebody.  Certainly  it  would  be  more  equitable 
on  paper  if  this  charge  for  the  provision  of  capital 
were  distributed  over  the  whole  community  by 
arrangement  made  by  the  Government  in  the  inter- 
ests of  the  whole.  If  we  could  conceive  an  ideal 
Government  at  work  on  the  job,  knowing  exactly 
what  its  citizens  most  needed  to  produce  for  their 
material  and  mental  welfare  and  thus  able  to  in- 
duce them  to  see  that  work  devoted  to  this  object  is 


CAPITAL  91 

the  best  thing  to  be  done,  it  is  possible  to  dream  of  a 
State  in  which  very  rapid  progress  might  be  made 
in  the  increase  of  goods  required  and  their  distribu- 
tion and  enjoyment. 

But  anyone  who  has  had  anything  to  do  with  a 
Government  Department,  as  they  are  at  present 
constituted,  is  likely  to  agree  that,  however  great 
their  virtues  and  however  acute  the  abilities  that 
they  can  command,  any  community  which  handed 
over  to  them,  and  to  the  politicians  behind  them, 
who  continually  obstruct  their  best  work,  the  en- 
tire control  of  its  material  welfare,  would  in  a 
very  few  years  be  more  than  likely  to  find  itself 
reduced  to  a  state  of  extreme  discomfort,  if  not  on 
the  verge  of  starvation.  Some  day  perhaps  we  may 
develop  a  Government  and  people  that  can  rise  to 
the  necessary  economic  pitch  for  making  the  ar- 
rangement that  would  be  required  by  the  abolition 
of  the  private  capitalist.  Until  that  day  comes,  we 
have  to  use  him  and  make  the  best  of  him,  not 
grudging  him  the  rate  of  interest  and  profit  he 
earns,  but  recognising  that  without  him  industry 
would  be  impossible,  and  for  this  reason  encourag- 
ing him  to  produce  and  multiply  as  much  capital 
as  he  possibly  can,  knowing  that  thereby  we  shall 
get  his  capital  at  a  cheaper  rate  than  if  he  and  it 
are  scarce,  and  knowing  also  that  the  more  capital 
we  can  get  out  of  him,  the  greater  will  be  the  de- 
mand for  labour  on  the  part  of  those  who  employ 
the  capital  and  the  cheaper  and  more  plentiful  will 
be  the  supply  of  goods  of  all  kinds  which  they  will 


92  THE  BUSINESS  OF  FINANCE 

pour  out  for  us  as  consumers.  Above  all,  it  seems 
necessary  that  those  who  control  the  machinery  of 
finance  should  try  to  educate  the  public  to  a  sounder 
view  of  the  benefit  conferred  upon  the  whole  com- 
munity by  those  who  do  this  dull  and  unattractive'^ 
business  of  savin^]^,  and,  especially  among  the  work- 
ing classes,  that  a  saving  machinery  should  be 
devised  in  order  to  encourage  the  labourers  them- 
selves to  become  as  far  as  possible  capitalists. 

It  has  been  pointed  out  before  now  that  if  the 
working  classes  would  for  a  few  years  forego  the 
use  of  alcoholic  liquors,  they  could  themselves  ac- 
quire a  store  of  capital  which  would  go  a  very  long 
way  to  ridding  them  of  dependence  upon  the  capital 
supplied  to  them  by  other  classes.  In  a  speech  at 
a  Labour  Congress  held  last  August  a  very  inter- 
esting statement  was  made  by  Mr.  John  Hill,  its 
President : 

"We  have  arrived,'^  he  said,  "at  a  working  agree- 
ment which  aims  at  every  trade  union  being  a  co- 
operator  and  every  co-operator  being  a  trade  union- 
ist, and  supporting  co-operation  industrially  and 
politically :  they  to  be  our  bankers  in  time  of  pros- 
perity and  our  lenders  in  time  of  adversity." 

This  is  a  process  out  of  which  a  highly  important 
movement  may  arise,  and  anything  that  can  be 
done  by  the  machinery  of  finance  to  quicken  a  move- 
ment by  which  the  working  classes  will  themselves 
become  capitalists  will  be  of  the  utmost  importance 
to  the  economic  stability  of  all  countries  in  which  it 
is  developed  and  the  future  material  progress  of 
mankind. 


CHAPTER   V 

COMPANY  CAPITAL 

Capital^  as  we  have  seen,  is  wealth  devoted  to 
production.  The  capital  of  companies  is  wealth  put 
into  companies  by  those  who  subscribe  to  their  cap- 
itals when  they  are  issued.  It  is  thus  through  com- 
panies and  their  capitals  that  finance  is  brought  into 
very  direct  and  intimate  relation  with  the  outside 
public,  usually  totally  ignorant  of  its  machinery. 
By  the  institution  of  companies  the  public  becomes 
a  sleeping  partner  in  industry  with  limited  liability. 
The  public  puts  money  that  it  has  saved  into  the 
hands  of  financial  experts  who  hand  it  over  to  in- 
dustrial experts  to  be  invested  in  enterprise  in  the 
widest  sense  of  the  word,  to  earn  a  profit  for  those 
who  have  subscribed  the  money.  The  system  is  ob- 
viously a  development  out  of  private  partnerships, 
in  which  a  certain  number  of  people  used  to  club 
their  capitals  together  to  work  some  enterprise  for 
their  mutual  profit. 

In  the  case  of  a  partnership  it  is  usual  that  the 
majority  of  the  partners  would  know  something 
about  the  business  to  be  conducted,  and  the  risks 
involved  by  the  enterprise.  In  the  case  of  joint 
stock  companies,  with  their  capitals  owned  by  an 

93 


94  THE  BUSINESS  OF  FINANCE 

enormous  number  of  ignorant  shareholders,  this  can 
no  longer  be  the  case,  and  so  the  problem  that 
finance  has  to  face  is  to  provide  investments  for  the 
public  which  will  encourage  it  to  save  money  for  the 
purposes  of  industry,  and  at  the  same  time  secure 
as  far  as  possible  that  the  money  so  invested  shall 
be  well  and  profitably  used.  The  system  is  obvi- 
ously one  which  carries  with  it  almost  infinite  pos- 
sibilities for  good  or  evil,  for  the  increase  of  the 
world's  wealth  or  for  the  waste  of  its  capital  on 
unremunerative  enterprise. 

The  public  whims  on  the  subject  of  the  use  of  its 
money  are  extremely  difficult  to  apply  to  the  fur- 
therance of  sound  production.  The  normal  instinct 
of  the  average  man  is  to  spend  any  money  that  he 
gets  without  any  consideration  for  his  own  future, 
and  still  less  for  the  desirability  of  increasing  cap- 
ital available  for  production  in  his  own  country  and 
in  the  world  at  large.  Those  who  do  save  money 
are,  in  many  cases,  almost  irresistibly  attracted  to 
the  brilliant  rather  than  the  sound  form  of  invest- 
ment. What  they  really  want  is  a  speculation  which 
will  give  them  a  large  increase  in  the  sum  that  they 
have  put  into  the  venture.  They  see  attractive  pros- 
pectuses and  circulars  promising  great  wealth  be- 
yond the  dreams  of  avarice,  and  when  these  ventures 
do  not  turn  out  a  success  they  regard  the  whole 
machinery  of  finance  as  a  complicated  swindle, 
which  is  best  left  alone. 

It  is  highly  important  for  the  future  development 
of  industry  that  some  more  reasonable  frame  of 


COMPANY  CAPITAL  95 

mind  should  be  developed  in  the  general  public  on 
the  subject  of  money  and  of  investment,  that  it 
should  be  taught  that  the  man  who  spends  all  that 
he  earns  or  gets,  on  his  own  amusement  and  enjoy- 
ment, leaves  the  world  materially  just  as  poor  as 
he  found  it,  and  that  if  we  all  managed  our  money 
affairs  on  these  simple  lines  industrial  progress 
would  be  impossible.  It  is  only  those  who  have 
saved  and  so  increased  the  equipment  of  mankind, 
in  its  power  over  nature  to  produce,  who  can  feel 
that  they  have  helped  towards  that  great  future 
when,  the  material  wants  of  man  being  easily  sup- 
plied, he  will  have  some  time  to  look  after  things 
that  are  perhaps  more  important.  Further,  it  has 
to  be  brought  home  to  people  who  do  save  money, 
that  short  cuts  to  fortune  in  most  cases  lead  straight 
into  a  morass.  That,  when  they  save,  what  they 
should  try  to  secure  is  not  a  shower  of  plums  from 
the  tree  of  fortune,  but  a  steady,  trustworthy  in- 
come from  their  investments,  and  that  it  is  their 
business  to  take  an  intelligent  interest  in  their  in- 
vestments, following  with  the  help  of  their  expert 
advisers  the  fortunes  of  the  companies  in  which 
they  are  interested,  and  doing  their  best  to  select 
those  which  are  organised  and  managed  on  sound 
lines. 

It  has  to  be  admitted  that  there  are  enormous 
difficulties  in  the  way  of  the  encouragement  of  any 
such  reasonable  interest  on  the  part  of  the  general 
public  in  its  investments  and  monetary  affairs  gen- 
erally.   The  accounts  published  by  most  companies 


96  THE  BUSINESS  OF  FINANCE 

are  very  far  from  intelligible  to  the  average  citizen. 
In  fact  they  sometimes  seem  to  be  designed  to  con- 
vey as  little  light  as  possible,  and  any  ordinary  per- 
son asked  to  sit  down  and  scan  a  company  balance 
sheet  might  be  very  well  excused  if  he  decided  it 
was  quite  impossible  to  make  head  or  tail  of  it.  As 
an  example  selected  at  random  the  balance  sheet  of 
Messrs.  Lipton,  Ltd.,  is  here  appended.  ( See  pages 
98-101.) 

In  one  respect  its  statement  is  a  little  bit  clearer 
than  many  of  those  which  are  issued  by  similar 
companies.  Many  of  them  at  the  top  of  the  two 
divisions,  into  which  the  balance  sheet  is  divided, 
put  the  mysterious  statements  "Debtor"  and  "Cred- 
itor," and  the  investor  who  is  trying  to  puzzle  his 
way  round  the  meaning  of  the  cryptogram,  begins 
to  wonder  why  he  should  be  debited  with  his  cap- 
ital. Lipton,  Ltd.,  do  put  as  a  heading  "Capital  and 
Liabilities"  on  one  side  and  "Assets"  on  the  other. 
In  one  sense  of  course  the  capital  of  a  company  is  a 
liability,  since  it  represents  in  most  cases  money 
received  from  the  shareholders  who  ordinarily  sub- 
scribe the  capital,  and  consequently  money  which 
the  company  has  to  account  for  to  its  shareholders 
(which  it  does  by  setting  out  on  the  other  side  as- 
sets in  which  the  money  has  been  invested),  and  to 
pay  back  to  them,  if  it  can,  if  the  company  should 
go  into  liquidation  and  be  wound  up. 

It  will  be  Keen  from  the  above  balance  sheet  that 
Messrs.  Lipton  have  a  total  capital  of  £2,350,000, 
of  which  £1,000,000  is  in  the  6%  cumulative  prefer- 


COMPANY  CAPITAL  97 

ence  shares  (these  terms  will  be  explained  later) 
and  1,250,000  ordinary  of  £1  each.  This  amount 
is  the  capital  of  the  company  in  the  strictest  sense 
of  the  word,  representing  the  money  of  the  pro- 
prietors of  the  concern.  Probably  it  does  not  all 
represent  money  actually  handed  over  at  the  time 
of  the  purchase  of  the  business,  because  part  of  the 
ordinary  shares  at  least  may  probably  have  been 
taken  by  the  sellers  of  the  business  when  they  turned 
it  into  a  joint  stock  company  and  invited  the  public 
to  take  shares  in  it.  But  as  it  stands  this  repre- 
sents the  interest  of  the  proprietors,  who  share  in 
varying  degrees  in  the  profits  earned  by  it,  and  in 
the  distribution  of  the  assets  in  the  event  of  wind- 
ing up. 

There  is  also  a  liability  in  the  shape  of  debenture 
stock,  bearing  4%  interest.  Debenture  stocks,  or 
mortgage  bonds  as  is  the  more  usual  form  in  Amer- 
ica, are  sometimes  spoken  of  as  the  capital  of  the 
company,  but  they  are  in  fact  not  capital  but  debts. 
The  interest  upon  them  has  to  be  paid  before  the 
owners  of  the  capital  receive  anything  by  way  of 
dividend,  and  in  the  case  of  winding  up  they  rank 
first. 

It  is  very  important  that  the  public,  in  making 
investments,  should  bear  in  mind  this  difference 
between  becoming  creditors  of  a  company  by  buying 
its  debenture  stocks  or  mortgage  bonds,  and  taking 
the  more  speculative  risk  of  becoming  a  partner  in 
the  enterprise  by  holding  preference  or  ordinary 
shares.    The  other  large  items  on  the  liability  side 


98  THE  BUSINESS  OF  FINANCE 

LIPTON  LIMITED 

balance  sheet  as  at  14th  march,  1914 
Capital  and  Liabiuties 

Capital: 

Cumulative     5     per     cent. 

Preference  Shares  of  £1..  £1,000,000.  0.  0. 

.  Ordinary  Shares  of  £1 1,250,000.  0.  0. 

£2,250,000.  0.  0. 

Debenture  Stock,  4  per  cent 500,000.  0.  0. 

Bills  Payable 297,636.13.  9. 

Overdraft  from  Bank 159,727.  2.  1. 

Sundry  Creditors  and  Directors'  Fees 207,295.12.  3. 

Savings  Bank  Deposits  and  Interest  accrued 

thereon 161,951.  0.  6. 

Unclaimed  Dividends 3,026.  4.  2. 

Interest  on  Debenture  Stock  accrued  at  Date.  8,974.  5.11. 

Premium  on  Shares  Account £220,888.17.  3. 

Reserve  Account. 145,000.  0.  0. 

365,888.17.  3. 

Pbofit  and  Loss  Account: 

Balance  brought 
from  previous 

year  £31,702.  8.  6. 

Profit  for  year 
ending  14th 
March,  1914....  160,286.  5.  5. 

£191,988.13.11. 

Deduct : 

(a)  Interest  on 
Debenture  Stock 

for  year £20,000.  0.  0. 

(b)  Interim  Div- 
idend on  Pref- 
erence Sh  a  r e  s 
paid  30th  Sep- 
tember,  1913...    25,000.  0.  0. 

(c)  Interim  Div- 
idend on  Ordin- 
ary Shares  paid 
19th  November, 

1913 37,500.  0.  0. 

82,500.  0.  0. 

109,488.13.11. 


£4,063.988.  9.10. 


COMPANY  CAPITAL  99 

LIPTON  LIMITED 

balance  sheet  as  at  14th  march,  1914 
Assets 

Goodwill  of  the  Business,  Free- 
hold and  Leasehold  Properties, 
and  Freehold  Estates  in  Ceylon. 

Amount  per  Bal- 
ance Sheet  at 
ISthMarch, 
1913,  at  Cost, 
less  amounts 
written  off  for 
Depreciation. .  .£1,847,824.11.1. 

Additional  Capi- 
tal Expenditure 
during  year. . .        10,115.  6.7. 

£1,857.939.17.  8. 

Less  written  off  for  Deprecia- 
tion  and  Lease  Eedemption 

during  year 4,978.18.  4. 

£1,852,960.19.  4. 


Plant,  Machinery,  Fixtures,  Fit- 
tings, Utensils,  Carts,  Horses, 
&c. 

Amount  per  Bal- 
ance Sheet  at 
15thMarch,1913.  £558,501.  7.8. 

Additions  during 

year  at  Branches       8,403.  3.9. 

Additions  during 
year  at  Stores, 
Factories,  &c...      13,813.14.3. 

£580,718.  5.  8. 

Less  written  off  for  Deprecia- 
tion during  year 18,222.13.  3. 


562,495.12.  5. 

Stocks-in-Trade,  per  certified  Inventories 1,084,337.16.  4. 

Sundry  Debtors 329,630.  1.  4. 

Insurances  unexpired  and  other  items  paid  in 
advance 19,569.11.  8. 

Investments  at  Cost  and  interest,  &c.,  accrued 
thereon  (Market  value,  £91,713.3s.l0d.) 99,892.15.  1. 

Savings  Bank  Investments  at  Cost,  and  In- 
terest accrued  thereon  (Market  value,  £30,- 
661.0s.0d.)    32,772.  7.  0. 

Cash  at  Bank  and  on  hand 82,329.  6.  8. 


£4,063,988.  9.10. 


100  THE  BUSINESS  OF  FINANCE 

PROFIT  AND  LOSS  ACCOUNT  FOR 
Dr. 

To  Expenses  of  Management,  including  Salaries, 
General  Charges,  Head  Office  Expenses, 
Auditors*  Fees,  Transfer  Office  Expenses, 
Savings  Bank  Expenses,  Advertising  and 
Law  Costs £121,489.13.  9. 

"    Bad   Debts 3,746.19.10. 

*'    Interest    on    Savings    Bank    De- 
posits   £5,612.  7.5. 

Less  Interest  on  Savings  Bank  In- 
vestments      1,217.15.7. 

4,394.11.10. 

**  Depreciation  on  Plant,  Fittings,  Fixtures, 
Utensils,  &c.,  at  Stores,  Head  Office,  and 
Branches  and  in  Ceylon ;  also  Provision  for 
Depreciation  of  Leaseholds 23,201.11.  7. 

"    Directors'  Fees 1,200.  0.  0. 

"    Fees  to  Trustees  for  Debenture  Holders 630.  0.  0. 

"   Balance    carried    to    Balance    Sheet,    being 

Profit  for  year 160,286.  5.  5. 


£314,949.  2.  5. 


COMPANY  CAPITIAlL..,  ;•,  ^       101 
YEAR  ENDING  14TH  MARCH,  1914 

Cb. 

By  Profit  on  Trading  at  Stores  and  Branches 
(after  deducting-  Wages  and  Working 
Expenses)    and   Profits  from   Estates   in 

Ceylon £310,534.10.  8. 

"   Transfer  Fees 403.19.  0. 

"   Interest,  &c.,  on  Investments 4,010.12.  9. 

£314,949.  2.  5. 

Auditors^  Report 

We  report  that  we  have  obtained  all  the  information  and 
explanations  we  have  required  as  Auditors. 

We  have  examined  and  compared  the  foregoing  Balance 
Sheet  and  Profit  and  Loss  Account  with  the  Books  and 
Vouchers  kept  in  London  and  the  returns  received  from 
Ceylon,  Calcutta,  Bombay  and  Sydney,  and  find  they  are  pre- 
pared in  accordance  therewith;  and,  subject  to  the  question 
of  depreciation  which  is  dealt  with  in  the  Directors'  Report, 
in  our  opinion  the  Balance  Sheet  is  properly  drawn  up  so  as 
to  exhibit  a  true  and  correct  view  of  the  state  of  the  Com- 
pany's affairs  according  to  the  best  of  our  information  and 
the  explanations  given  to  us,  and  as  shown  by  the  Books  of 
the  Company. 

LONDON,  25th  June,  1914. 


102        THE  BXTSJNES3  OF  FINANCE 

of  the  balance  sheet  are  bills  payable  for  nearly 
£300,000  and  an  over-draft  from  the  bank  for 
£160,000,  sundry  creditors  for  £207,000,  and  savings 
bank  deposits  and  interests  accrued  thereon  for 
£162,000.  These  items  may  be  put  together  as  repre- 
senting what  is  called  floating  debt,  and  they  repre- 
sent a  total  of  £820,000,  against  which  on  the  other 
side  of  the  account  we  see  sundry  debtors  £330,000, 
and  investments  and  items  paid  in  advance,  £120,- 
000.  There  are  also  total  reserves  among  the  lia- 
bilities amounting  to  £368,000,  of  which  £145,000 
has  apparently  been  reserved  out  of  the  profits,  and 
£221,000  has  been  provided  by  the  issue  of  shares 
from  time  to  time  at  a  premium,  that  is  to  say,  by 
their  sale  to  the  public  at  a  liigher  price  than  the 
£1  each  for  which  they  stand  as  a  liability.  These 
total  reserves  of  £366,000  are  thus  in  a  sense  the 
property  of  the  shareholders  just  as  much  as  the 
capital  that  they  have  subscribed.  They  have  been 
produced  either  by  profits  earned  in  the  course  of 
the  business  or  by  sales  of  shares,  owing  to  the  com- 
pany's good  credit,  at  a  premium.  This  reserve  ac- 
count should  thus  be  added  to  the  capital  of  the 
company  in  considering  w^hat  its  position  really 
is  if  it  went  into  liquidation.  It  is  not  money 
that  has  definitely  to  bo  paid  to  creditors  but  it 
is,  like  the  capital,  money  which  has  to  be  ac- 
counted for  to  shareholders  and  made  good  to 
them  if  the  assets  on  the  other  side  of  the  balance 
sheet  can  be  sold  to  produce  the  prices  put  against 
them. 


COMPANY  CAPITAL  103 

The  other  items  on  the  liabilities  side  represent 
the  sums  which  have  to  be  accounted  for  from  profit 
and  loss  account,  that  is  to  say,  the  net  earnings  of 
the  company  represented  by  the  amount  brought 
forward  from  the  previous  year,  the  amount  of  profit 
for  the  year  under  review,  less  sums  paid  out  for 
interest  on  debenture  stock  and  interim  dividends 
on  preference  shares  and  ordinary  shares.  We  thus 
find  out  of  the  total  of  over  £4,000,000,  to  which 
both  sides  of  the  balance  sheet  add  up,  about 
£2,700,000  are  represented  by  claims  on  the  part 
of  shareholders,  and  a  balance  in  the  shape  of  de- 
benture stock,  bills  payable,  over-draft,  creditors, 
savings  bank  deposits,  etc.,  definite  claims  which 
creditors  would  enforce  in  case  of  liquidation  be- 
fore the  shareholders  received  anything.  It  should 
be  added  that  the  item  of  savings  bank  deposits  and 
interest  accrued  thereon  is  unusual  in  a  commercial 
balance  sheet  of  this  kind.  Messrs.  Lipton  have 
seen  fit  to  add  to  the  facilities  given  to  their  cus- 
tomers the  provision  of  a  savings  bank  as  well  as 
tea  and  groceries.  It  is  perhaps  a  somewhat  ques- 
tionable policy  for  a  commercial  company  of  this 
kind  to  embark  in  unless  the  savings  bank  business 
is  kept  absolutely  separate  from  the  other  activities 
of  the  enterprise  and  the  money  received  from  sav- 
ings bank  depositors  is  represented  by  investments 
specially  made  on  their  behalf.  In  fact  we  see 
among  the  assets  an  item  of  £30,000  odd  of  savings 
bank  investments.  These  investments  are  presum- 
ably of  the  kind  which  could  be  easily  sold,  so  that 


104        THE  BUSINESS  OF  FINANCE 

any  sudden  rush  of  withdrawals  could  be  met  out 
of  them. 

There  are  thus  two  rather  distinct  forms  of  lia- 
bilities of  a  commercial  company  or  of  any  other 
company.  There  is  the  definite  sum  due  to  creditors 
or  on  bills  payable,  or  on  over-draft  from  bank 
which  have  to  be  met  unless  the  Company  admits 
itself  insolvent;  and  there  is  the  rather  more  hazy 
item  of  Shareholders'  Money  in  the  form  of  capital 
and  reserve  funds  accumulated,  which  the  Company 
has  to  make  good  if  it  can. 

Now,  when  we  look  at  the  other  side  of  the  bal- 
ance sheet,  we  come  to  a  really  interesting  question 
beoause  the  value  of  most  of  the  assets  in  most  com- 
panies is,  to  a  certain  extent,  elusive.  The  first 
asset  we  find  is  the  Goodwill  of  the  business,  Free- 
hold and  Leasehold  Properties  and  Leasehold  Es- 
tates. The  value  set  against  this  item  is  arrived  at 
by  taking  the  amount  in  the  previous  balance  sheet 
which,  we  are  told,  was  the  amount  at  Cost,  less 
amounts  written  off  for  Depreciation.  There  is  then 
added  an  additional  capital  expenditure  during  the 
year,  and  the  amount  written  off  for  Depreciation 
and  Lease  Redemption  during  the  year,  is  deducted 
and  so  we  arrive  at  the  big  total  of  £1,853,000 ;  and 
the  question  which  every  shareholder  would  like 
to  know  if  he  tries  to  study  the  balance  sheet  with 
anything  like  intelligent  interest  is,  whether  these 
assets  in  which  his  money  has  been  invested  would, 
if  they  had  to  be  realised,  produce  more  or  less  than 
the  sum  at  which  they  stand  in  the  balance  sheet. 


COMPANY  CAPITAL  105 

This  is  the  point  on  which  nobody  can  be  sure  be- 
cause nobody  knows  the  value  of  any  asset,  with 
the  exception  of  Cash  in  Hand  and  a  few  really 
marketable  securities  which  can  be  depended  upon 
to  produce  the  price  if  sold,  until  the  value  of  the 
asset  is  tested  by  an  attempt  to  sell  it.  The  value 
of  the  thing  being  what  it  will  fetch^  one  can  never 
be  quite  sure  of  its  value  until  one  actually  tries 
to  see  what  somebody  will  give  for  it. 

The  goodwill  of  the  business  is  a  thing  which 
always  puzzles  those  who  are  not  used  to  this  mys- 
terious term.  It  means  practically  the  value  of  the 
connection  and  the  selling  power  of  the  business 
when  it  was  bought,  and  it  is  an  item  so  difficult 
to  calculate  that  very  widely  differing  rules  have 
been  suggested  for  arriving  at  it.  One  of  these 
rules,  for  instance,  says  that  three  years'  purchase 
of  the  profits  of  the  business  is  enough  to  give  for 
goodwill  of  any  commercial  concern  under  the  sun. 
This  is  too  hard  a  saying  in  some  cases,  but  one 
thing  is  certain,  that  goodwill  is  not  an  item  that 
one  likes  to  see  flourishing  at  large  in  any  balance 
sheet.  The  best  financed  companies,  such  as  Banks 
and  Insurance  Companies,  write  the  goodwill  off 
out  of  the  profits  as  fast  as  they  can,  whenever  they 
acquire  an  existing  business,  and  pay  for  it  any- 
thing over  the  actual  old  iron  value  of  the  assets. 
It  is  still  more  objectionable  to  see  the  goodwill  of 
the  business,  as  in  this  case,  not  separately  valued 
in  the  balance  sheet  but  mixed  up  with  Freehold 
and  Leasehold  Properties  so  that  the  shareholder, 


106        THE  BUSINESS  OF  FINANCE 

in  trying  to  arrive  at  a  solution  of  the  problem  of 
the  real  value  of  the  assets,  does  not  even  know  how 
they  are  classified,  how  much,  for  example,  of  this 
£1,853,000  represented  by  the  first  item  among  the 
assets  is  good  will  and  how  much  is  freehold  and 
leasehold  properties  and  estates. 

This  question  is  a  very  important  one,  because,  if 
anything  went  wrong  with  the  Company  and  it 
found  itself  obliged  to  turn  its  assets  into  cash,  its 
goodwill  would,  from  the  nature  of  the  case,  be 
reduced  in  value  by  the  fact  that  it  had  fallen  on 
evil  days;  whereas  freehold  properties  and  estates 
might  easily  escape  the  contagion  of  the  Company's 
misfortunes  if  they  were  well  placed.  All  that  you 
can  be  sure  about  this  first  asset  is  that  it  repre- 
sents what  certain  properties  and  the  connection 
and  selling  power  of  Messrs.  Lipton  were  sold  at 
to  the  public  when  the  Company  was  formed  plus 
subsequent  additional  capital  expenditure,  less  the 
amounts  written  off  since  the  Company  has  been  in 
existence  for  depreciation.  Whether  these  amounts, 
so  invested,  were  well  invested  at  the  beginning, 
whether  the  assets  purchased  have  increased  or  de- 
creased in  value  since  they  were  bought,  whether 
sufficient  allowance  has  been  made  for  depreciation 
of  these  assets  which,  such  as  leasehold  properties, 
are  necessarily  declining  in  value — all  these  are 
things  as  to  which  the  average  shareholder  can 
supply  no  light  whatever. 

It  is  the  same  thing  with  the  next  item  among 
the  assets,  Plant,  Machinery,  Fixtures,  Fittings, 


COMPANY  CAPITAL  107 

Utensils,  Carts,  Horses,  etc.  It  is  the  same  thing, 
only  much  more  so,  because  all  these  items  are 
things  which  are  obviously  wearing  out  with  more 
or  less  rapidity,  and  any  attempt  on  the  part  of  a 
shareholder  to  guess  whether  the  price  ordinarily 
given  for  them  was  right,  whether  a  sufficient 
amount  has  been  written  off  for  depreciation  since 
they  were  bought,  and  how  they  would  fare  if  they 
had  to  be  sold  in  course  of  liquidation,  would  only 
land  him  in  a  maze  of  bewilderment.  They  will 
know,  when  they  read  the  Auditors'  Report,  that, 
subject  to  the  question  of  depreciation  which  is  dealt 
with  in  the  Directors'  Report,  the  Auditors  consider 
that  the  balance  sheet  is  properly  drawn  up,  etc., 
according  to  their  formula;  and  they  will  see,  if 
they  look  at  the  Directors'  Report,  that,  having 
spent  during  the  year  £23,979  on  Repairs  and  Re- 
newals, the  Directors  are  of  opinion  that  the 
amount  of  £23,202  which  they  have  allowed  for  de- 
preciation is  sufficient.  The  shareholder's  confi- 
dence in  the  Directors  of  a  Company  will  doubtless 
assure  him  that  the  Directors  would  not  form  this 
opinion  without  good  reason ;  but,  considering  what 
human  fallibility  inevitably  is,  there  is  still  a  cer- 
tain mistiness  about  the  value  of  over  half  a  million 
assigned  to  this  item  in  the  balance  sheet. 

Then  we  come  to  Stocks-in-Trade,  per  certified 
Inventories,  of  over  one  million.  This  is  the  stock 
of  goods  which  Messrs.  Lipton  hope  to  be  able  to 
sell  to  their  customers  at  a  profit  and,  under  ordi- 
nary circumstances,  would  no  doubt  succeed  in  do- 


108        THE  BUSINESS  OF  FINANCE 

ing  so.  But  here,  again,  there  is  always  the  possi- 
bility of  a  fall  in  prices  which  might  upset  the  value 
put  upon  this  item  in  the  balance  sheet;  and  then 
we  come  to  sundry  debtors  £330,000,  as  to  whom  the 
shareholders  can  only  hope  that  these  debtors  are 
good  and  will  duly  pay  what  they  owe  to  the  Com- 
pany. 

With  regard  to  the  other  items  there  is  less  ele- 
ment of  uncertainty.  Insurance  expenses  and  other 
items  paid  in  advance  are  a  definite  fact  about 
which  there  can  be  no  doubt.  Investments  at  cost 
and  interest  accrued  thereon  stand  in  the  balance 
sheet  just  under  £100,000,  and  a  note  in  brackets 
tells  us  that  the  market  value  of  them  is  less  than 
£92,000.  The  savings  bank  investments  at  cost  and 
the  interest  accrued  thereon  standing  at  nearly 
£33,000  are  again  stated  in  a  note  in  brackets  to 
have  a  market  value  of  under  £31,000.  So  that  with 
regard  to  these  two  items,  to  which  the  more  or 
less  trustworthy  test  of  market  value  can  be  ap- 
plied, we  find  that  their  market  value  is  consider- 
ably below  the  value  given  in  the  balance  sheet. 

Finally  we  come  to  cash  at  bank  and  on  hand, 
concerning  which  there  is  no  doubt.  There  it  is, 
£82,000  odd.  These  doubts  which  any  shareholder 
scanning  any  balance  sheet  is  justified  in  feeling 
about  what  might  happen  if  the  assets,  which  he 
sees  priced  at  such  and  such  a  figure,  had  to  be 
sold  in  order  to  return  his  capital,  apply  with  more 
or  less  strength  in  the  case  of  nearly  all  balance 
sheets  which  anybody  can  contemplate.    The  near- 


COMPANY  CAPITAL  109 

est  approach  to  certainty  can  be  got  in  the  case  of 
investment  companies  whose  assets  consist  entirely 
of  marketable  securities  with  a  free  market  and  a 
trustworthy  quotation.  Any  balance  sheet  which 
contains  freehold  property,  buildings,  plant,  ma- 
chinery, utensils,  equipment,  horses,  carts,  and  a  big 
block  of  stock-in-trade,  whatever  it  may  be,  may 
always  involve  a  certain  amount  of  guess  work.  All 
that  the  public  can  do  is  to  try  to  repose  confidence 
in  the  right  people,  and  to  believe  that  the  Directors 
of  the  companies  with  whom  it  places  its  money 
make  the  most  earnest  endeavours  always  to  keep 
the  balance  sheet  with  the  closest  possible  relation 
to  veracity;  but  then  the  public's  power  to  distin- 
guish between  the  amount  of  confidence  to  be  re- 
posed between  one  Board  of  Directors  and  another 
is  almost  nil.  The  best  kind  of  Directors  are  the 
men  who  are,  or  have  been,  hard  at  work  in  some- 
sort  of  business  similar  to  the  kind  which  is  done 
by  the  Company,  and  are  the  least  known  to  the 
general  public.  We  still  seem  to  be  a  long  way  ofF 
the  very  necessary  amount  of  knowledge  which 
ought  to  be  secured  to  every  shareholder  before 
indulging  in  an  investment,  and  until  this  knowl- 
edge can  somehow  be  granted  it  is  hardly  reason- 
able to  expect  that  industrial  investments  will  be 
really  popular. 

It  is  not  wonderful  that  the  average  shareholder 
when  faced  by  a  Company  balance  sheet  should  give 
up  the  task  in  despair  of  trying  to  unravel  its  mys- 
teries and  should  usually  test  the  value  of  a  security 


no        THE  BUSINESS  OF  FINANCE 

by  some  quite  irrelevant  consideration,  such  as  the 
fact  that  it  owns  a  shop  at  the  corner  of  his  street, 
or  by  its  paying  a  good  dividend  or  because  he  has 
heard  from  a  friend  who  has  a  relative  in  its  em- 
ployment that  it  is  a  very  good  thing  to  have 
money  in.  Sometimes  he  is  guided  in  his  choice  of 
investments  by  the  names  of  the  Directors,  but  in 
England  this  method  of  guessing  the  value  of  the 
security  is  somewhat  out  of  fashion.  British  snob- 
bery used,  at  one  time,  to  have  a  preference  for 
Companies  whose  Boards  were  decorated  with  the 
names  of  peers,  and  some  years  ago  a  case  was 
fought  in  the  English  courts  in  which  a  gentleman 
brought  a  claim  against  a  Company  promoter  for 
500  guineas  which  was  the  fee  alleged  to  have  been 
promised  to  him  for  securing  a  certain  earl  to  sit 
on  the  Board.  His  claim  w^as  found  to  be  a  good 
one  and  he  got  his  money,  the  judge  remarking  that 
it  was  a  queer  kind  of  traffic,  but  the  arrangement 
appeared  to  be  entirely  businesslike — the  claimant 
had  carried  out  his  promise  and  was  entitled  to 
his  money.  Experience,  however,  has  taught  the 
British  public  that  it  is  not  always  a  trustworthy 
method  of  assessing  the  prospects  of  a  Company 
and,  as  a  balance  sheet  is  usually  beyond  their  com- 
prehension, their  methods  in  investment  are  usually 
reduced  to  haphazard  guess  work,  except  in  those 
fortunate  cases  when  they  get  hold  of  a  first  rate 
stockbroker  and  trust  him  and  follow  his  advice. 
In  the  present  state  of  the  economic  education  of  the 
public  perhaps  this  is  the  best  system  that  can  be 


COMPANY  CAPITAL  111 

devised,  but  it  is  urgently  desirable  that  those  re- 
sponsible for  the  machinery  of  finance  should  do 
their  utmost  to  encourage  a  healthy  intelligence 
among  all  classes  of  people  as  to  the  duties  of  the 
investor  and  the  common  sense  with  which  he 
should  fulfil  them.  It  pays  finance  that  there  should 
be  as  little  bad  and  rotten  finance  in  existence  as 
possible.  To  secure  this  end  it  is  necessary,  in  the 
first  place,  to  try  to  teach  the  public  what  invest- 
ment means.  Mr.  Vanderlip,  as  already  quoted, 
has  lately  said  that  the  Americans  are  a  nation  of 
economic  illiterates ;  the  pamphlet,  in  which  I  saw 
this  remark  of  Mr.  Vanderlip's,  wanted  to  know 
what  Mr.  Vanderlip  and  other  American  bankers 
had  been  doing  to  correct  this  state  of  things. 
Whether  it  is  fair  to  impose  this  duty  of  teaching 
the  public  upon  financiers  is  an  open  question,  but 
there  can  be  no  doubt  that  it  would  pay  them  very 
handsomely  to  do  so.  Any  measure  that  would  in- 
crease the  knowledge  that  the  public  has  concerning 
the  benefits  conferred  upon  the  community  and 
upon  mankind  at  large  by  those  who  save  money 
and  invest  it  well,  would  be  an  enormous  gain  to 
those  who  handle  the  machinery  of  finance  and 
wish  to  see  finance  purged  of  the  evil,  crawling 
things  that  creep  about  the  dark  places  in  its  hinter- 
land, but  this  is  a  long  process  and  would  take  many 
years  to  compass.  In  the  meantime  something  at 
least  can  be  done  to  secure  greater  clearness  in  bal- 
ance sheets  and  a  hisfher  ideal  of  good  finance 
among  those  responsible  for  the  investment  of  the 


112         THE  BUSINESS  OF  FINANCE 

public's  money.  A  balance  sheet  taken  by  itself 
throws  very  dim  light  on  the  position  of  the  Com- 
pany that  publishes  it.  It  is  a  fairly  common  prac- 
tice in  America  to  give  on  every  balance  sheet  the 
corresponding  figures  of  the  previous  one,  and  there 
seems  to  be  no  reason  why  this  system  should  not 
be  made  universal.  It  should  also  be  recognised 
that  a  balance  sheet  is  not  really  designed  to  con- 
ceal the  position  of  the  Company,  but  to  make  it  as 
clear  as  possible  and  for  this  end  the  fullest  detail 
is  desirable  and  the  system  by  tvhich,  as  is  shown 
in  the  example  given  above,  an  item  like  good  will 
is  lumped  together  with  freehold  and  leasehold 
properties,  should  be  discouraged.  Unfortunately 
in  the  course  of  the  war  there  has  been  some  retro- 
gression among  English  Companies.  It  is  cynically 
suggested  that  this  process  has  been  encouraged  by 
the  imposition  of  the  Excess  Profits  Tax  which  has 
made  companies  eager  to  give  as  little  as  possible 
information  concerning  their  position.  There  is 
probably  very  little  truth  in  this  suggestion,  be- 
cause the  Inland  Kevenue  authorities  are  hardly 
likely  to  be  guided  much  by  the  inspection  of  the 
published  balance  sheet  in  the  case  of  any  com- 
panies concerning  whose  earning  power  they  have 
reason  to  wish  for  fuller  information,  but  it  is  not 
a  good  sign  to  see  two  at  least  of  the  great  English 
Steamship  companies  making  their  balance  sheet 
into  a  farce  by  having  one  item  only  on  its  asset 
side  in  which  their  whole  property  is  lumped  to- 
gether in  one  preposterous  jumble. 

But  when  all  this  is  said  the  fact  remains  that 


COMPANY  CAPITAL  113 

for  years  to  come  the  general  public  will  be  worse 
than  ignorant  on  the  subject  of  investment  and, 
since  it  is  above  all  necessary  for  the  material  prog- 
ress of  mankind  that  the  investor  should  be  pro- 
tected against  his  own  folly  and  stupidity  and 
should  be  encouraged  to  save  money  and  invest  it 
by  the  knowledge  that  he  can  do  so  with  the  great- 
est possible  confidence,  financiers  should  try  to  de- 
vise some  means  to  this  end.  Hitherto  the  highest 
class  of  financiers  have,  at  any  rate  in  England, 
confined  their  operations  chiefly  to  Public  Securi- 
ties, such  as  Government  and  Municipal  Loans,  and 
to  issues  made  by  great  railways  and  occasionally, 
and  rather  as  a  concession,  to  the  securities  of  very 
first-rate  industrial  companies.  Consequently  it 
has  been  left  to  a  horde  of  second  and  third-rate 
company  promoters  to  deal  with  the  very  impor- 
tant question  of  the  promotion  of  the  ordinary  in- 
dustrial company,  in  the  preparation  of  its  pros- 
pectus and  the  market  in  its  securities.  And  Min- 
ing shares,  in  which  gambling  possibilities  and  the 
uncertainties  of  what  may  happen  underground 
have  added  to  the  inevitably  doubtful  elements  that 
are  associated  with  so  many  investments,  have  been 
left  very  largely  in  the  hands  of  people  who  have 
frankly  invited  the  public  to  a  gaming  table  in 
which  the  odds  are  largely  in  favor  of  the  bank. 
It  is  a  question  whether  the  really  high-class  finan- 
cial leaders  have  not  made  a  mistake  in  adopting 
this  rather  exclusive  attitude.  Any  losses  that  are 
made  owing  to  dishonest  company  promoting  and 
mining  swindles  are  debited  by  an  unreasonable 


114         THE  BUSINESS  OF  FINANCE 

public  to  the  financial  centre  as  a  whole,  though  it 
is  probably  a  place  in  which  there  is  a  generally 
higher  level  of  honesty  than  in  most  other  circles 
of  the  community.  As  compared  to  the  haunts  of 
politicians  and  lawyers  it  shines  like  a  good  deed 
through  a  naughty  world.  It  is  difficult  to  see  how 
the  purging  process  can  be  brought  about,  but  there 
is  no  more  urgent  need.  It  might  perhaps  be  done 
by  some  extension  of  the  system  adopted  in  England 
of  what  is  called  Trust  Companies.  These  com- 
panies make  it  a  business  to  invest  the  capital  that 
they  receive  from  their  shareholders  in  the  securi- 
ties of  other  companies,  thus  enabling  each  of  their 
sliareholders  to  spread  his  risk  by  each  holding  part 
of  the  capital  of  the  Company,  which,  in  its  turn, 
holds  a  large  and  diversified  amount  of  securities. 
The  system  has  not  been  without  its  critics.  One 
cynic  remarked  concerning  it  that  a  Trust  Com- 
pany was  a  concern  which  enabled  people  to  hold 
collectively  a  mass  of  securities  not  one  of  which 
they  would  touch  individually.  Nevertheless  it  has 
been  on  the  whole  fairly  successful;  and  it  might 
be  possible  for  the  leaders  of  finance,  by  undertak- 
ing through  this  means,  modified  for  the  purpose, 
the  business  of  investing  the  money  of  the  public 
for  it,  to  devise  a  machinery  by  which  investors 
should  be  certain  that  by  acquiring  securities  in 
Trust  Companies  with  certain  names  on  the  Board 
they  would  be  putting  their  money  collectively  into 
securities  which  had  at  any  rate  been  selected  by 
experts  after  due  consideration  of  their  merits. 


CHAPTER   VI 

THE  MANUFACTURE  AND   MARKETING  OP  SECURITIES 

Companies  and  the  securities  which  represent 
claims  on  their  property  and  profits  come  into  being 
by  the  issue  of  a  prospectus.  As  everybody  knows, 
Joint  Stock  Companies  are  formed  either  because 
somebody  has  a  notion  for  an  enterprise  and  not 
enough  capital  of  his  own  to  work  it  and  conse- 
quently appeals  to  the  general  public  to  put  funds 
into  it  on  the  expectation  of  profits  to  be  earned, 
or  because  the  owners  of  an  existing  business  wish, 
for  various  reasons,  to  turn  it  wholly  or  partly  into 
cash  by  inviting  the  public  to  subscribe  for  its  cap- 
ital. Or  sometimes  again  because  owners  of  an 
existing  enterprise  wish  to  increase  the  amount  of 
capital  at  their  command  and  think  that  they  can 
do  so  most  cheaply  and  simply  by  turning  it  into 
a  Joint  Stock  concern  and  so  getting  money  from 
the  public  with  which  to  increase  its  scope.  Which- 
ever of  these  causes  be  the  origin  of  the  Company, 
an  appeal  to  the  public  through  a  prospectus  is  the 
usual  course  for  supplying  the  capital. 

On  this  subject  of  prospectuses,  and  the  regula- 
tions and  restrictions  under  which  they  should  be 
drawn  up,  there  has  been  in  the  past  much  contro- 

115 


116         THE  BUSINESS  OF  FINANCE 

versy,  and  there  is  likely  to  be  more  in  the  future, 
when,  after  the  war,  appeals  for  industrial  capital 
once  more  become  possible.  On  this  question,  as 
on  so  many  others,  there  are  two  main  schools  of 
thought,  one  of  which  advises  as  much  freedom  as 
possible  for  those  who  invite  subscriptions  from 
tlie  public  for  new  securities  and  in  the  terms  in 
which  they  appeal  to  it,  and  the  other  is  in  favour 
of  strict  regulation  and  control,  either  by  the  Gov- 
ernment or  by  the  authorities  of  the  Stock  Ex- 
change, with  a  view  to  protecting  the  public  against 
its  own  ignorance.  The  question  is  an  extremely 
difficult  one  on  the  face  of  it.  In  individualistic 
nations  like  America  and  England  the  attractions 
of  freedom  seem  to  weigh  down  the  balance.  The 
old  legal  doctrine  Caveat  emptor^  signifying  that 
anybody  who  makes  a  bad  purchase  has  only  got 
his  own  stupidity  to  thank,  is  a  nice  simple  rule 
which  saves  everybody  a  great  deal  of  trouble  and 
throws  upon  the  individual  the  responsibility  for 
looking  after  his  money.  It  would  be  an  ideal  prin- 
ciple to  work  upon  if  everybody  were  even  reason- 
ably educated  on  the  subject  of  money  matters.  As 
it  is,  the  full  and  logical  application  of  this  prin- 
ciple leaves  so  many  doors  open  to  fraud  and  swin- 
dling, for  which  the  ignorance  and  stupidity  of  the 
public  are  ultimately  responsible,  that  good  finance 
is  besmirched  by  the  wrong-doing  of  its  unsavoury 
hangers-on. 

It  is  very  like  the  old  theory  that  there  should  be 
absolute  freedom  of  contract  between  man  and  man 


THE  MARKETING  OF  SECURITIES    117 

and  that  anything  like  Government  interference  in 
such  matters  as  wages  or  factory  conditions  was  an 
unwarrantable  hampering  of  individual  freedom 
which  could  only  do  harm  in  the  long  run.  Here 
again  the  principle  would  have  been  absolutely 
sound  if  the  people  to  whom  it  was  applied  had 
been  treated  on  this  ideal  basis,  but,  when  it  was  a 
question  of  complete  freedom  of  contract  between, 
on  the  one  side,  a  set  of  employers  who  had  wealth 
and  knowledge  behind  them  and  could  afford  to 
wait  and  keep  their  works  shut  up  if  they  thought 
it  suited  their  interests  to  do  so,  and,  on  the  other, 
a  set  of  workmen  with  no  resources  to  fall  back 
upon,  no  education  that  could  tell  them  what  other 
chances  there  were  of  employment  in  other  lines 
of  life  and  nothing  but  starvation  ahead  of  them  if 
they  were,  for  any  length  of  time,  out  of  work,  the 
application  was  so  obviously  unfair  that  the  Gov- 
ernment has  had  to  interfere  more  and  more  with 
the  working  out  of  the  principle  of  freedom. 

In  money  matters  it  is  very  much  the  same  thing. 
We  have,  on  the  one  side,  a  public  which  under- 
stands little  or  nothing  about  the  machinery  of 
investment  and  is  impelled  by  many  of  the  most 
obvious  qualities  of  the  human  mind,  such  as  its 
improvidence,  its  desires  to  back  its  luck  and  its 
eagerness  to  acquire  wealth  without  trouble,  to 
make  bad  mistakes  whenever  it  approaches  prac- 
tical questions  of  finance.  It  is  easy  to  answer  that 
the  public  has  only  to  choose  a  good  stockbroker 
or  a  good  financial  adviser,  put  confidence  in  him 


118        THE  BUSINESS  OF  FINANCE 

and  follow  him  and  all  will  be  well  with  it.  This  is 
perfectly  true,  but  how  is  the  public  to  know  who 
is  a  good  stockbroker  or  who  is  a  good  financial 
adviser?  There  seems  to  be  no  way  round  the  dif- 
ficulty except  the  terribly  slow  one  of  the  gradual 
education  of  the  public  to  a  state  of  more  common 
sense  about  money  matters  and  more  intelligent 
interest  in  what  happens  to  its  money,  so  that  it  may 
give  at  least  as  much  attention  to  investing  its 
savings  as  it  does  to  buying  its  clothes  or  its  cigars, 
and,  at  the  same  time,  the  working  of  the  process 
by  which  somehow  or  other  the  best  elements  of 
finance  shall  be  able  to  exercise  a  greater  control 
over  the  worst  ones,  whose  misdoings,  at  present, 
are  continually  bringing  the  whole  machinery  into 
disrepute.  In  the  meantime  can  anything  be  done 
by  stricter  Government  regulation  in  regard  to  the 
preparation  of  prospectuses  and  the  formation  of 
companies? 

In  Germany,  the  land  where  freedom  gets  short 
shrift,  and  finance,  like  most  other  departments  of 
life,  is  controlled  and  ordered  about  by  a  Sergeant- 
Major  of  a  Government,  it  cannot  be  claimed  that 
the  regulations  and  control  imposed  have  eliminated 
the  swindler  from  German  life.  Experience  in  Eng- 
land of  Government  control  during  the  war  in 
matters  of  new  issues  and  of  finance  in  general,  is 
not  likely  to  cause  any  general  hankering  for  its 
continuance  a  moment  longer  than  is  warranted  by 
the  war^s  interests.  Delays  and  redtape  have,  as 
seems  to  be  inevitable  with  Government  regulations, 


THE  MARKETING  OF  SECURITIES     119 

strewn  the  path  of  Treasury  control  over  new  issues 
of  securities  with  blasphemous  criticism. 

Finance,  however,  can,  I  think,  do  something  on 
its  own  account  to  try  to' improve  the  standard  of 
prospectuses  and  the  methods  of  company  promo- 
tion, pending  the  long  delayed  date  when  the  public 
may  perhaps  have  learnt  some  sense  for  itself.  It 
is  not  well  that  small  companies  with  speculative 
possibilities  and  small  capitals,  which  lend  them- 
selves so  easily  to  Stock  Exchange  manipulation, 
should  be  left  in  the  hands  of  third  rate  company 
promoters.  The  great  ones  of  the  earth  in  finance 
must  see  that  the  system  by  which  they  restricted 
their  operations  to  Government  and  Municipal 
loans,  railway  issues  and  a  few  very  select  indus- 
trials, has  not  been  good  for  them  or  for  the  public. 
These  are  democratic  days  and  it  is  above  all  de- 
sirable that  capital  should  be  made  as  democratic 
as  possible.  What  we  want  to  secure  is  to  see  that 
every  member  of  the  community,  who  has  any  con- 
trol over  money,  shall  see  that  saving  it  is  not  an 
act  of  skinflint  meanness,  but  one  that  confers  bene- 
fit on  the  community  and  furthers  the  economic 
progress  of  mankind,  and  that  his  savings,  however 
small,  shall  be  well  taken  care  of  on  his  account  and 
that  he  shall  not  be  induced  by  misrepresentations 
and  deceptions  to  throw  his  money  down  the  sink 
and  consequently  to  be  convinced  that  it  would  have 
paid  him  much  better  to  have  spent  it  on  his  own 
amusement. 

Every  good  industrial  prospectus  that  appears 


120        THE  BUSINESS  OF  FINANCE 

makes  all  the  bad  ones  look  worse.  What  we  want 
is  that  there  shall  be  as  many  good  ones  as  possible 
so  that  the  bad  points  of  the  IBjRrones  may  be  made 
more  glaringly  apparent.  The  good  points  of  a 
prospectus,  as  of  a  balance  sheet  or  any  other  finan- 
cial statement,  consist,  as  one  need  hardly  say,  of 
clearness,  candour  and  fullness.  Anyone  who  picks 
one  up  ought  to  be  able  to  see  from  its  perusal 
exactly  what  the  company  is  buying,  exactly  what 
it  is  paying  for  it,  exactly  what  has  been  paid  for 
it  by  any  vendors  who  have  passed  it  on  from  one 
to  the  other,  say,  during  the  previous  two  years, 
exactly  what  its  previous  earnings  have  been  year 
by  year  and  not  over  an  average,  and  exactly  what 
arrangements  have  been  made  with  regard  to  the 
placing  of  the  capital  by  underwriting  or  otherwise, 
that  is  to  say,  how  much  is  being  paid  to  anybody 
who  may  be  undertaking  to  take  over  the  securities 
issued  if  the  public  fails  to  do  so.  It  is  a  fairly 
modest  claim  to  urge,  that  the  public  should  be  told 
this  much  before  it  is  asked  to  put  money  into  a 
company  that  is  appealing  for  subscriptions,  but  a 
very  large  number  of  prospectuses  that  used  to  ap- 
pear in  the  past  would  not  have  come  up  to  this  com- 
paratively modest  ideal. 

When  we  come  to  the  forms  of  securities  they  may, 
as  a  general  rule,  be  roughly  divided  into  three. 
There  are,  first  of  all,  the  securities  which  embody 
not  proprietorship  or  partnership  in  any  company 
or  concern,  but  creditorship,  involving,  sometimes 
more  and  sometimes  less,  the  right  to  wind  the  com- 


THE  MARKETING  OF  SECURITIES     121 

pany  up  and  to  foreclose  on  its  property  in  case  the 
interest  due  is  not  paid  to  date.  In  this  category 
would  also  be  included  the  debts,  bonds  or  obliga- 
tions, whatever  they  are  called,  of  Governments, 
Municipalities  and  public  bodies,  the  great  advan- 
tage of  which  lies  in  the  fact  that  their  security  does 
not  depend  on  the  earning  power  of  any  particular 
enterprise  or  company,  but  on  the  taxable  capacity 
either  of  the  nation  or  the  State  or  of  a  town  or  of 
a  country  district  which  has  been  made  responsible 
for  the  due  payment  of  the  interest  and  repayment 
of  the  debt  by  its  legally  empowered  authorities. 

It  is  in  this  class  of  securities  that  the  real  in- 
vestor finds  what  he  wants,  if  indeed  he  can  be  really 
said  to  exist.  The  real  investor,  though  the  line 
between  investment  and  speculation  is  a  very  dif- 
ficult one  to  draw,  is,  in  my  opinion,  one  who  puts 
money  into  securities,  not  with  any  view  to  an  in- 
crease either  in  the  income  from  them  or  in  the 
capital  value  of  them,  but  simply  in  the  hope  of  a 
secure  and  exact  interest  upon  them,  with  the  cer- 
tainty of  repayment  some  day  at  due  date  if  the 
security  be  made  so  definitely  repayable.  A  real 
investor,  as  long  as  his  interest  was  secure,  would 
never  bother  to  look  in  the  papers  to  see  whether 
his  securities  had  gone  up  or  down  a  quarter,  and 
it  would  not  occur  to  him  to  jump  in  and  out  of 
them  on  the  chance  of  increasing  by  a  few  pounds 
the  capital  that  he  invested. 

As  a  matter  of  fact  very  few  of  us  find  ourselves 
able  to  cultivate  this  philosophical  detachment  on 


122        THE  BUSINESS  OF  FINANCE 

the  subject  of  investments.  Most  of  us  feel  pleased 
if  our  securities  go  up  in  price  and  are  tempted  to 
sell  them  and  to  put  the  money  into  something 
cheaper  and  repeat  the  operation.  We  ought,  of 
course,  to  know  that  if  our  securities  have  gone  up, 
and  if  their  security  has  been  at  all  times  unim- 
peachable, they  have  not  gone  up  for  any  reason 
affecting  it,  but  merely  because  the  demand  for  first 
rate  investments  has  been  greater  than  the  supply 
and  that  consequently  all  equally  good  securities 
will  have,  roughly  and  more  or  less,  risen  together. 
It  will,  therefore,  not  be  possible  to  take  advantage 
of  the  rise  by  acquiring  any  other  security  that  has 
lagged  behind,  and  that  what  we  shall  really  be 
doing  if  we  effect  an  exchange,  will  be  to  buy  some- 
thing that  is  not  quite  so  well  secured  and  cross  the 
boundary  line  into  speculation  by  buying  in  the 
hope  of  a  rise. 

Other  forms  of  securities  are  those  which,  more 
or  less,  imply  proprietorship  of  a  company  instead 
of  the  more  privileged  position  of  a  creditor.  If 
you  buy  preferred  or  preference,  or  common  or 
ordinary  stocks  and  shares  you  become  a  proprietor. 
If  you  hold  preference  of  preferred  securities  you 
will  find  yourself  entitled  to  a  fixed  rate  of  dividend 
which  may,  or  may  not,  be  cumulative,  that  is  to  say 
that  if,  in  one  year,  the  company  is  unable  to  meet 
it,  the  arrears  will  have  to  be  met  before  the  ordin- 
ary stockholders  receive  any  dividend.  It  is  also 
usual  for  the  preference  holders  to  be  given  priority 
in  the  event  of  liquidation.    That  is  to  say,  if  the 


THE  MARKETING  OF  SECURITIES    123 

company  is  wound  up  and  its  assets,  after  meeting 
all  due  debts,  do  not  leave  enough  to  pay  off  in  full 
the  preference  and  the  ordinary  holders,  the  prefer- 
ence holders  have  a  right  to  the  return  of  their 
capital  before  the  ordinary  get  anything. 

Since  preference  holders  then  have  priority  in 
income  and  in  return  of  capital,  it  is  usual  for  their 
income  and  for  their  claim  for  return  of  capital  to 
be  limited  to  a  fixed  rate  in  one  case  and  to  the  face 
value  of  the  security  in  the  other.  Sometimes,  how- 
ever, they  receive  the  right  to  participate  both  in 
income  and  assets  after  the  ordinary  have  received 
a  fixed  amount,  but,  in  any  case,  the  preference 
holder  is  on  a  different  footing  from  the  creditor, 
because  he,  by  becoming  a  proprietor,  has  thrown 
in  his  lot  with  the  company  and  shares  in  its  for- 
tunes with  specified  limits. 

Many  people,  consequently,  have  a  holy  horror 
for  preference  and  preferred  securities,  arguing 
that  if  the  company  does  well  they  get  no  more  than 
their  fixed  rate  of  dividend,  whereas  if  the  company 
does  ill  their  preference  right  is  almost  certain  to 
be  evaded  by  the  threat  of  compulsory  liquidation 
with  possibly  disastrous  results,  that  debts  ranking 
ahead  of  them  can,  at  any  time,  be  created  and  that 
consequently  they  are  neither  an  investment  nor  a 
speculation,  but  a  miserable  compromise  with  the 
advantages  of  neither.  It  cannot  be  denied  that 
there  is  some  truth  in  these  contentions.  It  seems 
to  be  more  reasonable  to  make  up  one's  mind  exactly 
whether  one  does  want  an  investment  or  a  specula- 


124        THE  BUSINESS  OF  FINANCE 

tion — if  only  one  could  be  really  honest  with  one- 
self on  the  point — and,  having  made  up  one's  mind, 
to  go  for  one  or  the  other  instead  of  compromising 
on  an  amphibious  hybrid. 

In  Ordinary  stocks  and  shares  the  speculative 
element  is  inevitable,  that  is  to  say,  if  the  security  is 
really  Ordinary,  and  it  is  entitled  to  take  all  the 
profits  left  over  and  above  for  division,  after  meet- 
ing interest  on  debt  and  dividends  on  Preference 
shares,  and,  in  the  case  of  liquidation,  to  take  what- 
ever is  left  of  the  capital  assets  after  debts  and 
Preference  holders  have  been  satisfied.  But  it 
sometimes  happens  that  a  share  which  is  called 
Ordinary  is  entitled  to  a  cumulative  rate  of  interest, 
and  one  finds  that  there  is  a  Deferred  share  or  a 
Management  share  or  a  Founder's  share  or  some 
other  kind  of  security  which  takes  the  final  bite  off 
the  profits  of  the  concern. 

Sometimes,  often  in  fact,  these  Founders'  or  Man- 
agement shares  only  rank  for  dividends  after  the 
Ordinary  has  received  a  certain  amount  and  they 
divide  the  balance  of  profit,  either  taking  one  half 
of  it  or  some  other  agreed  portion.  The  existence 
of  this  kind  of  security  is  often  criticised  as  bad 
finance  and  as  likely  to  lead  to  Directors  and  Man- 
agers, in  whose  hands  these  securities  generally 
stand,  dividing  too  much  of  the  profits  of  the  busi- 
ness so  that  the  income  from  their  Founders'  or 
Management  shares  may  be  satisfactorily  increased. 
It  seems  to  me  that  there  is  not  very  much  in  this 
criticism,  though  there  may  have  been  cases  in 


THE  MARKETING  OF  SECURITIES    125 

which  rascally  Boards  may,  by  paying  too  high 
dividends,  have  put  too  high  a  value  on  their 
Founders'  shares,  and  then  passed  them  on  to  some 
ignorant  person  who  did  not  understand  the  game. 
But  this  kind  of  rascality,  when  it  is  on  the  war- 
path, can  find  plenty  of  opportunities  quite  apart 
from  the  existence  of  Founders'  shares,  and  there 
have,  in  fact,  been  many  excellently  managed  and 
financed  companies  in  which  Founders'  shares  have 
been  prominent  in  the  picture. 

With  regard  to  this  question  of  the  denomination 
of  shares  and  securities,  the  only  suggestion  that 
need  be  made  is  that  companies  might  be  obliged, 
either  by  law  or  by  the  regulations  of  the  Stock 
Exchange,  not  to  apply  labels  to  securities  that  are 
in  any  way  misleading,  as,  for  instance,  when  a 
security  is  called  a  prior  lien  or  a  first  mortgage, 
when  its  actual  qualities  do  not  entitle  it  to  any 
such  respectful  designation. 

When  we  come  to  the  question  of  the  market  in 
securities  and  the  rules  and  regulations,  if  any, 
which  might  secure  the  elimination  of  securities  in 
which  it  is  not  good  for  the  public  to  deal,  we  are 
faced  again  with  the  same  problem  as  in  the  case 
of  regulation  and  control  of  prospectuses  and  com- 
pany promotion.  If  control  is  secured,  there  is  an 
end  of  that  freedom  and  elasticity  which  is  the  basis 
of  the  best  qualities  of  the  Anglo  Saxon  race  and 
has  been  the  foundation  of  the  enormous  wealth  and 
prosperity  that  it  has  built  up  on  both  sides  of  the 
Atlantic  and  all  over  the  world. 


126         THE  BUSINESS  OF  FINANCE 

If  we  do  not  control  at  all,  we  leave  the  greed  and 
ignorance  of  the  public  face  to  face  with  a  horde 
of  sharks  who  are  only  anxious  to  prey  on  it  and  do 
so  with  chronic  and  continuous  success.  This  is  the 
rough  cure  by  which  the  economic  Providence  tries 
to  teach  mankind  not  to  be  a  fool  about  its  money. 
But  when  we  leave  the  disease  to  be  handled  by  this 
drastic  but  very  slow  working  treatment,  we  allow 
things  to  happen  which  cause  misgiving  and  mis- 
apprehension in  the  eyes  of  a  critical  public — when 
it  is  seen  that  shady  company  promoters  and  people 
who  make  a  living  by  preying  on  the  gullibility  of 
the  public  found  County  families  and  hand  on  to 
their  offspring  a  substantial  claim  for  all  time  on 
the  productive  power  of  humanity.  People  naturally 
begin  to  wonder  whether  a  financial  system  which 
permits  these  things,  is  really  admirable,  and 
whether  it  would  not  be  better  to  hand  over  the 
whole  business  of  wealth  producing  and  consump- 
tion to  the  State. 

To  anyone  who  believes  in  individual  freedom 
and  individual  initiative  as  the  real  basis  of  energy, 
progress  and  morality  and  everything  else  that 
counts,  the  growth  of  such  a  view  seems  to  be  dis- 
aster, but,  just  as  democracy  is  on  its  trial  in  the 
war,  individualism,  and  with  it  the  institution  of 
private  property,  will  perhaps  be  still  more  severely 
on  their  trial  when  the  war  is  over  and  our  financial 
system,  which  is  so  closely  allied  with  both,  will 
have  to  do  its  very  best  to  purge  away  any  blemishes 
which  could  be  used  as  a  brick-bat  by  the  critical. 


THE  MARKETING  OF  SECURITIES     127 

In  most  Continental  countries  the  closest  watch 
is  kept  by  Government  over  the  admission  of  securi- 
ties to  quotation  on  the  Bourse.  As  is  well  known, 
this  weapon  has,  in  the  past,  been  effectively  used 
by  Governments  in  order  to  obtain  diplomatic  and 
fiscal  concessions.  In  France,  for  example,  if  there 
were  any  question  of  a  quotation  being  granted  to 
a  loan,  say  of  a  South  American  Republic,  the 
authorities,  before  giving  the  requisite  permission 
would  be  likely,  in  the  first  place,  to  stipulate  that 
at  least  a  proportion  of  the  money  raised  by  the 
loan  should  be  spent  in  France,  and  would  very 
likely  take  the  opportunity  to  make  representations 
concerning  any  tariff  imposed  upon  French  wines 
or  other  goods. 

In  England  before  the  war  the  Government  had 
no  control  whatever  upon  the  action  of  the  Stock 
Exchange  Committee  in  granting  or  withholding 
quotations  to  securities.  It  was  often  urged  that 
either  the  Government  or  the  Committee  should 
make  the  same  stipulations  as  Continental  Govern- 
ments when  foreigners  came  to  us  asking  for  a 
market  for  their  securities ;  and  that  it  should  be  a 
condition  that  any  money  subscribed  to  loans  in 
England  should  be  spent,  at  least  in  part,  in  this 
country,  so  giving  employment  to  British  industry. 
In  fact  the  absence  of  any  such  restriction  often 
brought  financial  business  to  London  which  it  would 
otherwise  have  missed,  and  it  came  to  us  because  the 
borrowers  did  not  care  to  submit  to  the  stipulations 
imposed  in  Paris  or  elsewhere.    Moreover,  it  seems 


128        THE  BUSINESS  OF  FINANCE 

to  me,  that  the  effectiveness  of  these  stipulations  is 
a  delusion.  They  are  not  really  necessary  at  all. 
Any  country  that  borrows  from  another  must  neces- 
sarily stimulate  the  export  trade,  in  the  widest  sense 
of  the  word,  of  the  lender  unless  it  makes  use  of 
the  loan  merely  to  repay  previous  indebtedness  or 
to  meet  interest  which  it  would  otherwise  be  unable 
to  provide,  or  takes  away  the  proceeds  in  gold.  We 
know,  as  a  matter  of  fact,  that  this  latter  means  of 
payment  of  the  money  that  was  lent  by  English 
financiers  was  hardly  ever  employed ;  consequently, 
although  it  did  not  follow  that  the  borrowing  coun- 
try actually  spent  the  money  that  it  borrowed  in 
England,  its  action  in  borrowing  here  meant  that 
English  industry  had  to  make  an  export  of  some 
kind,  somewhither,  because  the  loan  that  had  been 
made  by  the  financiers  gave  somebody  a  claim  over 
English  goods  and  services  which  could  only  be  met 
by  their  export. 

If  it  is  desirable  that  stricter  regulations  should 
be  made  concerning  the  kind  of  security  that  is 
allowed  to  be  quoted  on  the  Stock  Exchange,  it  cer- 
tainly seems  to  be  desirable  that  the  responsibility 
in  this  matter  should  be  in  the  hands,  not  of  the 
Government  or  of  any  oflficial  authority,  but  in  those 
of  the  Stock  Exchange,  working  in  the  interests  of 
finance  and  all  its  customers. 

When  once  oflScial  interference  is  introduced,  in 
the  first  place  you  get  red  tape  and  all  kinds  of 
official  delays,  absurd  restrictions  and  a  multitude 
of  incomprehensible  forms  to  be  filled  up.    These 


THE  MARKETING  OF  SECURITIES     129 

are  mere  puddles  in  the  road  of  progress  which  can 
be  stepped  over  by  those  who  are  used  to  them,  but 
a  much  more  serious  objection  lies  in  the  fact  that 
when  once  the  Government  exercises  the  power  of 
refusing  the  right  to  issue  securities  or  to  quote 
them  and  deal  with  them  on  the  Stock  Exchange, 
the  public  inevitably  jumps  to  the  conclusion,  in 
spite  of  the  most  explicit  and  carefully  worded  dis- 
claimers to  the  contrary  on  the  part  of  the  Govern- 
ment, that  any  issue  which  is  authorised  to  be 
brought  out,  quoted  and  dealt  in,  has  been  hall- 
marked by  the  Government. 

I  came  across  a  very  pleasant  practical  example 
of  t'liis  curious  tendency,  in  the  course  of  1916,  when 
an  extremely  unfortunate  company  was  authorised 
to  make  an  issue  by  the  British  Treasury  and  I  was 
told,  not  by  a  member  of  the  ignorant  and  finan- 
cially unreasonable  public,  but  by  a  very  careful 
and  clever  Scotsman  and  banker,  that  he  had  sub- 
scribed for  a  large  number  of  shares  because  the 
fact  that  it  had  received  Treasury  sanction  showed 
that  it  must  be  a  good  thing.  If  this  is  the  impres- 
.^ion  conveyed  upon  the  mind  of  a  highly  trained 
financial  expert,  it  is  obvious  that  the  guileless  Clerk 
in  Holy  Orders  with  a  large  family  and  a  craving  for 
high  dividends  is  still  more  likely  to  be  misled  into 
the  delusion  that  what  the  Treasury  allows  it 
virtually  guarantees. 

And  this  argument,  though  not  so  strong  in  the 
eyes  of  the  general  public  if  such  regulation  is  ex- 
ercised by  a  Stock  Exchange  Committee  as  if  it  is 


130         THE  BUSINESS  OF  FINANCE 

performed  by  the  Government,  nevertheless  remains 
a  thing  to  be  carefully  considered.  If  once  a  Stock 
Exchange  indulges  in  more  than  merely  formal 
examination  of  the  companies  and  securities  that 
it  is  asked  to  admit  to  dealings  within  its  walls,  it 
begins  to  accept  responsibility  before  the  public 
which  is  certain  to  be  much  greater  in  the  mind  of 
the  public  than  it  can  possibly  be  in  the  view  of  the 
Committee  or  other  ruling  body. 

Freedom  has  made  London  the  world-wide  market 
for  securities  of  all  kinds.  It  has  also  made  possible 
much  swindling,  large  loss  to  the  public  and  many 
gains  to  the  light-fingered  camp-followers  of  the 
financial  army.  The  question  is,  whether  finance 
can  deal  with  these  camp-followers  whose  depreda- 
tions on  the  public  are  continually  ascribed  to  it, 
and  that  not  without  some  justification,  because 
they  work  through  the  abuse  of  the  forms  of  the 
best  finance.  The  old-fashioned  idea  that  if  the 
public  is  fool  enough  to  come  into  the  market 
and  deal  in  any  gold  bricks  that  are  manufactured 
for  its  edification,  then  the  public  has  only  to  thank 
itself  for  its  losses,  is  absolutely  sound  as  a  matter 
of  ethical  and  economic  theory,  but  it  produces 
results  which  do  harm,  and  if  finance  can  see  a  way 
of  modifying  it  and  giving  the  public  a  certain 
amount  of  protection  without  too  much  sacrifice  of 
freedom,  something  will  have  been  done  to  make  the 
future  of  finance  cleaner,  more  comfortable  and 
more  profitable  for  the  noisome  insects  that  lurk 
in  the  chinks  of  the  fabric. 


THE  MARKETING  OF  SECURITIES     131 

Then  as  to  speculation  and  time  bargains.  Some 
moralists  tell  us  that  it  would  be  much  better  for 
the  public  if  all  speculation  by  means  of  time  bar- 
gains was  controlled  out  of  existence.  In  other 
words,  that  the  system  by  which  a  man  can  buy 
securities  which  he  does  not  mean  to  pay  for,  or 
sell  securities  that  he  does  not  mean  to  deliver,  in 
the  hope  of  closing  the  bargain  a  week  hence,  or  a 
month  hence,  or  a  year  hence  at  a  profit,  should  be 
done  away  with. 

In  the  first  place,  even  if  this  were  done  you 
would  not  stop  speculation  in  the  sense  in  which 
I  am  using  the  word — that  is  to  say,  the  purchase 
of  securities,  not  with  a  view  to  getting  a  steady 
revenue  from  them,  but  with  the  hope  of  a  rise  in 
price.  It  would  merely  mean  that  the  speculator, 
instead  of  buying  1,000  rubber  shares  in  what  is 
called  the  "Sixpenny  Bazaar,''  trusting  to  be  able 
to  carry  them  over  in  the  market  until  he  either  is 
able  to  take  a  profit  or  is  compelled  by  disgust  to 
cut  a  loss,  would  buy  a  much  smaller  quantity  and 
pay  for  them.  His  risk  of  loss  would  be  much  the 
same.  The  moral  obliquity  of  the  transaction,  if 
any,  has  no  relation  with  its  arithmetic,  so  that 
such  an  attempt  to  control  speculation  would  fail 
in  its  object  of  preventing  people  from  losing  money 
and  from  being  naughty. 

Moreover,  is  speculation  naughty?  It  is  a  very 
stupid  way  of  losing  one's  money,  because  the  odds 
are  heavily  against  the  amateur  in  gambling  in  a 
market  which  is  always  likely  to  be  ringed  and  con- 


132         THE  BUSINESS  OF  FINANCE 

trolled  by  professionals,  who  know  every  move  in 
the  game,  and  have  access  to  early  information,  and 
means  of  manufacturing  and  putting  it  about  if 
there  is  none  to  be  got.  Nevertheless,  backing  one's 
luck  is  a  thing  which  has  to  be  done  continually 
through  life.  Life  itself  is  largely  a  gamble  against 
incalculable  forces.  The  desire  to  gamble  is  almost 
universal  and,  within  reasonable  limits,  legitimate. 
The  more  it  is  repressed  and  frowned  on  by  respec- 
tability the  more  the  public's  craving  for  it  will  be 
provided  for  by  unscrupulous  touts  and  the  finan- 
cial equivalents  of  street-corner  bookmakers.  Spec- 
ulation, moreover,  carries  with  it  the  distinct  eco- 
nomic advantage  that  it  makes  a  market  freer  and 
steadies  the  level  of  prices.  These  securities  are 
/  most  easily,  quickly,  and  cheaply  dealt  in,  in  which 
a  speculative  account  is  open  and  consequently  a 
big  business  is  being  transacted.  In  the  long  run 
and  on  the  average  the  speculator  loses  his  money. 
By  doing  so  he  provides  facilities  for  investors,  and 
gives  steadiness  to  markets. 


CHAPTER  VII 

INTERNATIONAL  CURRENCY 

So  FAR  we  have  considered  these  problems  of 
finance  chiefly  from  the  point  of  view  of  their  work- 
ing and  effect  at  home.  When  we  come  to  look  at 
them  from  an  international  point  of  view  they  be- 
comt  more  difficult,  more  complicated  and  more 
interesting.  Though  it  is  always  dangerous  to 
prophesy,  there  seems  to  be  no  doubt  that  the  result 
of  the  present  world  crisis  which  has  already  knit 
most  of  the  world  together  for  purposes  of  mutual 
protection  and  destruct'on,  will  knit  it  still  more 
closely  together  in  the  future;  and  we  may  even 
hope  that,  instead  of  its  being  divided  into  two 
hostile  camps,  it  will  be  made  into  one  great  union 
for  mutual  co-operation  in  the  great  work  of  de- 
velopment. 

If  this  be  so,  it  is  very  necessary  that  we  should, 
all  of  us,  learn  to  think,  as  far  as  we  can,  in  terms 
of  world-wide  progress.  Thinking  imperially  was 
a  big  thing  to  do  a  few  years  ago,  but  great  and 
splendid  as  the  British  Empire  is,  there  is  some- 
thing still  more  great  and  splendid  about  the  idea 
of  a  league  of  nations,  leagued  together  to  promote 
prosperity  and  progress,  breaking  down  barriers 
instead  of  setting  them  up  and  combining  with  one 

133 


134         THE  BUSINESS  OF  FINANCE 

another  in  doing  the  best  work  to  improve  the 
material  and  other  welfare  of  mankind. 

International  currency  and  the  means  by  which 
individuals  in  one  nation  make  payments  to  those 
in  others  thus  become  a  matter  of  even  greater 
importance  than  before  in  the  light  of  the  new 
sun  of  civilization  which  we  hope  to  see  rise.  Inter- 
national currency  arrangements  are  one  of  the  de- 
vices in  which  business  men  have  shown  the  most 
successful  ingenuity  in  solving  a  very  difficult  prob- 
lem. In  time  of  peace  the  machinery  worked  with 
extraordinary  smoothness  and  success.  Payments 
were  made  for  the  huge  amount  of  goods  and  serv- 
ices constantly  exchanged  between  nations  by  an 
ingenious  mechanism  of  paper  money  largely  un- 
controlled and  not  even  understood  by  Govern- 
ments, with  the  occasional  assistance  of  shipments 
from  one  country  to  another  of  gold  coin  or  bullion 
when  the  paper  and  credit  machinery  did  not  suffice 
to  complete  the  business. 

The  foundation  of  this  machinery  is  the  Bill  of 
Exchange  already  referred  to  in  Chapter  II  as  a 
specialised  form  of  currency,  the  use  of  which  is 
largely  restricted  to  business  men  and  financiers 
and  is  seldom  handled  by  the  general  public  in  its 
retail  purchases.  As  was  then  pointed  out,  a  Bill 
of  Exchange  is  in  essence  simply  an  order  to  pay, 
and  the  cheques  with  which  we  meet  our  family 
expenses  are  merely  a  form  of  the  Bill  of  Exchange, 
payable  on  demand  and  drawn  on  a  bank. 

In  order  to  instruct  our  bankers  to  pay  so  many 


INTERNATIONAL  CURRENCY        135 

pounds,  shillings  and  pence  to  our  butchers  we 
must  have  obtained  the  right  to  do  so  either  by- 
depositing  money  with  the  bank  or  by  getting  a 
loan  from  it  in  order  to  give  us  the  right  to  draw. 

In  its  original  form  the  Bill  of  Exchange  was 
an  order  exercised  by  somebody  who  had  acquired 
the  right  to  instruct  another  person  to  pay  money 
by  selling  him  goods  or  rendering  him  some  services 
for  which  he  was  liable  to  pay,  or,. in  some  cases, 
merely  because  the  drawer  of  the  Bill  considered 
that  the  party  drawn  upon  was  in  duty  bound  to 
meet  it,  as  in  the  example  when  English  monas- 
teries and  abbeys  had  Bills  drawn  upon  them  by 
a  Pope  who  wanted  to  raise  the  wind  for  war-like 
purposes.  In  this  case  the  Bills  were  drawn,  and 
the  unfortunate  clergy  drawn  upon  were  informed 
that  they  would  be  excommunicated  if  they  did 
not  accept  and  meet  them. 

More  usually  the  seller  of  the  goods  shipped  his 
produce,  say  from  London  to  Damascus,  and  drew 
a  Bill  of  Exchange  on  his  Levantine  buyer,  order- 
ing him  to  pay  the  price  of  the  goods  either  to  the 
seller  or  to  the  order  of  anybody  else  whom  the 
seller  might  name.  As  the  Bill  was  usually  drawn 
payable  two,  three  or  six  months  after  sight  or 
date,  that  is  to  say,  either  after  the  day  on  which 
the  party  drawn  on  saw  and  accepted  the  Bill  or 
after  the  day  on  which  the  drawer  of  the  Bill  drew 
it,  there  was  thus  a  period  of  time  granted  during 
which  the  buyer  of  the  goods  would  be  able  to  dis- 
pose of  them  either  in  the  shape  in  which  they  were 


136         THE  BUSINESS  OF  FINANCE 

received  or,  in  the  case  of  raw  material,  after  work- 
ing them  up  into  manufactured  articles. 

It  is  these  Bills  of  Exchange,  drawn  by  the  ship- 
pers of  goods  or  the  providers  of  services  in  one 
country  on  people  in  another  country,  who  are 
buying  the  goods  or  using  the  services,  that  have 
hitherto  constituted  the  chief  supply  of  interna- 
tional currency.  If  an  English  merchant  shipped 
coal  to  Scandinavia  he  has  a  Bill  of  Exchange  on 
Scandinavia  to  dispose  of.  If  the  shipment  con- 
sists of  £10,000  worth  of  coal,  he  would  draw  on 
Mr.  Olafsen  of  Christiania  for,  say,  180,000  Nor- 
wegian kroner.  The  Bill  would  then  run:  "Two 
months  after  sight,  pay  ourselves  or  order  the  sum 
of  180,000  kroner  for  10,000  tons  of  coal  shipped 
per  S.S.  Vulcan,"  or  words  to  that  effect. 

Whatever  the  article  sold  or  whatever  the  services 
rendered  by  English  traders  to  a  foreign  country, 
all  items  of  visible  or  invisible  export  either  pro- 
duce Bills  of  Exchange  on  the  countries  to  which 
the  goods  and  services  go,  or  make  it  necessary  for 
somebody  in  the  country  to  which  the  goods  and 
services  go,  to  buy  a  Bill  on  London  with  which 
to  complete  payment.  For  example,  the  more  usual 
mode  by  which  the  payment  for  the  export  of  coal 
would  be  made  would  be  for  Mr.  Olafsen  to  buy 
from  his  banker  in  Christiania  a  sterling  Bill  on 
London  and  remit  it  to  the  seller  of  the  coal.  This 
he  would  only  be  able  to  do  if  the  Norwegian  tim- 
ber merchants,  fish  merchants  and  other  exporters 
of  Norwegian  produce,  had  been  selling  goods  to 


137 

England  and  consequently  had  been  able  to  draw 
Bills  on  their  English  buyers.  If  a  Norwegian 
merchant  had  sent  £10,000  worth  of  timber  to  a 
London  importer,  Olafsen's  banker  would  be  able 
to  buy  his  sterling  Bill  on  London,  which  he  could 
send  to  the  Hull  coal  merchant  who  could  dispose 
of  it  through  his  banker  by  selling  it  in  the  London 
discount  market.  If  the  Bill  were  payable  at  sight 
it  would,  of  course,  be  presented  for  immediate 
payment.  If  it  were  drawn  payable  some  months 
hence,  it  would  first  have  to  be  accepted  by  the  tim- 
ber merchant,  or  any  banker  or  finance  house  which 
he  had  induced  to  accept  Bills  on  his  behalf  by  the 
payment  of  the  usual  commission.  It  would  then 
be  sold  through  the  machinery  of  the  Discount 
Market  and  probably  finally  be  held  as  an  invest- 
ment by  some  English  bank  until  it  became  due  at 
maturity. 

By  this  highly  ingenious  machinery  for  exchange 
between  one  country  and  another  all  goods  or  serv- 
ices produce  the  currency  in  which  to  pay  for  them- 
selves, and  as  long  as  a  fairly  even  balance  is  main- 
tained in  the  mutual  indebtedness  of  any  two  coun- 
tries their  exchanges  of  goods  and  services  can  be 
paid  for  by  this  simple  process  of  creating  currency 
for  the  purpose  with  extraordinary  ease  and  smooth- 
ness. 

There  is  no  need  to  enter  into  a  detailed  exposi- 
tion of  the  various  kinds  of  goods  and  services 
exchanged  between  countries.  It  has  been  done 
over  and  over  again  in  the  text^books,  and  all  that 


138         THE  BUSINESS  OF  FINANCE 

we  have  to  bear  in  mind  for  the  present  is  that 
many  things  come  into  the  question  of  the  mutual 
indebtedness  of  the  great  trading  countries  of  the 
world  besides  the  actual  volume  of  tangible  com- 
modities shipped  or  transferred  from  one  country 
to  another. 

Reference  was  made  in  a  sentence  above  to  vis- 
ible and  invisible  exports.  Visible  exports,  of 
course,  are  the  articles  of  merchandise  actually 
shipped  or  transferred.  They  are  recorded  in  the 
statistical  returns,  first  of  the  shipping  country 
and  afterwards  of  the  country  to  which  they  go, 
but  on  the  way  they  have  become  more  valuable, 
having  come  across  the  sea  from  the  place  where 
they  were  made  to  the  place  where  they  were  want- 
ed. Consequently,  we  find  that  if  we  add  up  the 
imports  and  exports  of  all  the  great  trading  coun- 
tries together  they  apparently  import  in  the  aggre- 
gate a  much  larger  amount  than  they  export.  Clear- 
ly this  is  not  so.  The  amount  imported  and  ex- 
ported must  actually  balance,  but  the  imports  are 
more  valuable  for  the  reason  already  given,  because 
they  have  been  shipped  to  the  country  where  they 
are  wanted,  and  consequently  the  cost  of  shipment 
and  insurance  against  marine  and  other  risks  has 
to  be  added  to  the  value  with  which  they  left  the 
country  of  origin.  In  other  words,  if  coal  comes 
from  Hull  to  Christiania  on  a  British  ship,  this 
is  a  case  both  of  visible  and  invisible  export.  The 
coal  is  the  visible  export,  the  services  rendered  by 
the  English  shipping  company  is  the  invisible  ex- 


INTERNATIONAL  CURRENCY         139 

port,  and,  if  the  insurance  of  the  goods  while  in 
transit  has  been  effected  by  an  English  company^ 
that  is  another  invisible  export  to  be  added  to  the 
value  of  the  coal  before  it  reaches  its  buyer. 

Another  obvious  kind  of  invisible  export  is  pro- 
vided by  those  countries  which  every  year  are 
thronged  by  visitors  from  abroad,  the  most  notable 
examples  of  which  are  France,  Switzerland  and 
Italy  and,  to  a  less  extent,  England  and  Scotland. 
On  this  account  England,  however,  probably  im- 
ports more  than  she  exports.  That  is  to  say  the 
British,  in  normal  times  travel  abroad  in  larger 
quantities  and  spend  more  money  in  so  doing  than 
is  the  case  with  regard  to  the  number  and  spend- 
ing powers  of  the  foreigners  who  come  to  our  shores. 

England  imports  from  Europe  and  other  places 
to  which  her  citizens  travel,  health,  change  of  scen- 
ery and  the  other  so-called  pleasures  of  travel.  The 
p]nglishmen  travelled  to  the  other  countries  to  fetch 
these  imports,  and  the  money  that  they  spent  abroad 
has  to  be  constantly  made  good  by  the  shipment  of 
English  goods  either  to  the  countries  in  which  the 
money  is  spent  or  to  other  countries  so  as  to  pro- 
duce credits  for  England,  or  else  the  sums  to  which 
England  is  liable,  owing  to  the  spending  of  her  citi- 
zens abroad,  have  to  be  set  off  against  the  sums 
owed  by  other  countries  to  England  on  account  of 
interest  payable  for  loans  made  in  the  past  or  on 
other  accounts. 

It  was  calculated  that  in  the  days  before  the  war 
the  citizens  of  the  United  States  used  to  spend 


140        THE  BUSINESS  OF  FINANCE 

about  50  millions  sterling  per  annum  on  travelling 
in  Europe,  and  so  the  war  which  broke  out  in 
Europe  in  1914  compelled  the  Americans  to  save 
practically  the  whole  of  the  sum  hitherto  devoted  to 
this  form  of  invisible  export,  because  it  became 
too  dangerous  for  travel  in  Europe  to  continue. 

Reference  has  already  been  made  to  interest  on 
loans.  Lending  money  abroad  is  anotlier  foi*m  of 
invisible  export.  If  England,  as  she  used  in  old 
times,  takes  up  an  issue  of  Pennsylvania  Railroad 
Bonds,  say  for  25  million  dollars,  the  result  is  that 
America  exports  to  England  the  Pennsylvania  Rail- 
way Company's  promises  to  pay  for  that  amount 
and  England  has  to  pay  for  these  promises  to  pay, 
which  her  investors  put  away  into  their  tin 
boxes,  by  shipping  goods  to  America  or  by  setting 
the  transaction  off  against  any  payment  that  may 
be  due  from  America  to  her.  Afterwards,  every 
half-year,  when  the  interest  on  tliese  bonds  falls 
due,  England  exports  the  coupons,  or  claims  to  in- 
terest, to  America  and  America  has  to  ship  goods  in 
payment  of  them.  When  the  Bonds  fall  due  for 
repayment,  England  sends  the  Bonds  back  again 
to  be  paid  for  by  America,  and  so  whenever  one 
country  invests  money  in  another  it  first  of  all 
makes  an  invisible  import  by  importing  promises 
to  pay;  it  then,  as  long  as  these  promises  to  pay 
are  outstanding,  makes  invisible  exports  period- 
ically in  the  form  of  claims  for  interest  and  finally 
makes  an  invisible  export  by  returning  the  prom- 
ises to  pay  to  be  met  on  maturity. 


INTEKNATIONAL  CURKENCY  141 

There  is  thus  at  all  times  an  enormous  volume 
of  cross-entries  in  the  international  accounts.  Very 
often  two  nations  will  be  shipping  to  one  another 
actually  the  same  kind  of  produce;  for  instance, 
French  ladies  sometimes  buy  tailor-made  clothes, 
when^  tailor-made  clothes  are  the  fashion,  in  Lon- 
don, ^hile,  at  the  same  time,  English  ladies  are 
buying  what  are  called  creations  and  costumes  from 
the  artists  who  produce  them  in  Paris. 

England,  with  the  biggest  and  most  widely  dis- 
tributed trade  of  any  country  in  the  world,  had 
a  particularly  complicated  trade  balance.  Before 
the  war  she  had  what  is  called  an  "adverse  trade 
balance'-  with  regard  to  visible  trade,  that  is,  with 
regard  to  tangible  goods  such  as  can  be  shipped  and 
classified  in  a  schedule,  of  130  millions,  this  being 
the  amount  by  which  her  imports  exceeded  her 
exports.  Quite  lately  she  was  assured  by  a  colonial 
Premier  that  she  was  thereby  ruining  herself  be- 
cause this  balance  had  to  be  paid  for  in  golden 
sovereigns.  This,  of  course,  was  untrue.  On  the 
other  side  of  the  account  she  could  put,  according 
to  estimates  made  by  statisticians,  about  200  mil- 
lions a  year  for  interest  on  loans  previously  made 
abroad,  about  100  millions  a  year  for  the  cost  of 
the  services  of  her  merchant  ships,  and  30  or  40 
millions  a  year  for  her  insurance  premiums,  bank- 
ers' commissions  and  other  invisible  services  of  that 
sort.  On  the  invisible  trade  she  thus  had  a  very 
large  balance  in  hand,  and  this  balance  she  used 
to  use  by  investing  it  abroad  and  so  continually  in- 


142         THE  BUSINESS  OF  FINANCE 

creasing  the  amount  due  to  her  in  interest  which 
other  countries  had  to  pay  by  the  shipment  of  goods. 
Every  time  a  country  makes  an  export,  visible  or 
invisible,  she  thus  creates  a  claim  on  some  other 
country,  and  every  time  she  buys  something  abroad, 
the  selling  country  has  a  claim  upon  her  and,  as 
long  as  a  fair  approach  to  equilibrium  is  main- 
tained, the  supply  of  bills  of  exchange  will  be  about 
equal  to  the  demand,  and  what  is  called  the  rates 
of  exchange  will  be  somewhere  near  the  normal 
level.  It  is  not  necessary  that  one  country  should 
anything  like  balance  its  trade  with  each  of  the 
other  countries  of  which  it  is  a  customer.  For  in- 
stance, Canada  used  habitually  to  buy  from  Amer- 
ica much  more  goods  than  she  sold  to  her.  On 
the  other  hand,  Canada  used  to  sell  to  England 
much  more  goods  than  she  bought  from  her,  and 
so  Canada  was  always  able  to  pay  for  the  American 
produce  that  she  bought  by  the  bills  on  London 
which  her  sales  of  wheat  and  other  produce  to  Eng- 
land enabled  her  to  draw. 

By  this  system  of  balancing  the  claims  on  and 
due  to  the  various  countries  of  the  world,  owing 
to  their  exchanges  of  goods  and  services,  interna- 
tional remittance  was  carried  out  with  astonish- 
ing ease  and  simplicity. 

There  were,  of  course,  occasions  in  the  course 
of  this  world-wide  exchange  of  goods  and  services 
on  which  one  country  or  another  would  have  too 
big  a  balance  on  the  credit  or  the  debit  side.  For 
example,  in  times  before  the  war  it  was  a  normal 


INTERNATIONAL  CURRENCY         143 

experience  for  America  to  owe  more  to  Europe  in 
the  first  eight  months  or  so  of  the  year  and  to  have 
a  balance  in  her  favour  during  the  last  four.  This 
happened  because  America's  chief  exports  in  those 
times  consisted  of  the  produce  of  the  earth  which 
w^as  not  harvested  and  shipped  until  the  autumn. 

During  the  first  eight  months  of  the  year  Amer- 
ica had  to  pay  interest  to  Europe  on  money  invested 
in  her  industries  and  railroads  by  the  capitalists 
of  the  Old  World,  had  to  pay  for  goods  imported 
and  also  had  to  finance  the  great  expenditure  of 
American  travellers  on  the  Continent. 

During  the  last  four  months  the  shipping  of  her 
cereal  and  cotton  crops  turned  the  balance  on  the 
other  side,  and  America  normally  had  more  money 
to  take  from  Europe  than  she  had  to  pay. 

This  seasonal  deficiency  in  the  early  part  of  the 
year  turned  the  Rate  of  Exchange,  that  is  to  say, 
the  price  at  which  bills  on  London  could  be  sold 
in  the  New  York  market  against  America  and  in 
favour  of  London.  The  parity  price  for  these  Bills 
was  $4.86.6  to  the  pound  sterling.  This  is  the 
Rate  which  expresses  the  relative  gold  value  of  the 
coinage  of  the  two  countries. 

In  the  first  two-thirds  of  the  year,  owing  to  the 
preponderance  of  payment  that  America  had  to 
make  to  Europe,  the  demand  for  Bills  on  London 
would  naturally  be  greater  than  supply,  for,  it  will 
be  remembered  that  a  country  normally  producer 
Bills  on  foreign  centres  by  selling  goods  and  serv- 
ices to  foreigners,  so  giving  it  a  right  to  order  for- 


144         THE  BUSINESS  OF  FINANCE 

eigners  to  pay  money  to  it  or  to  any  other  party 
whom  it  may  name. 

For  the  reasons  above  given  during  the  first  eight 
months  of  the  year  Bills  on  London  would  be  want- 
ed in  New  York,  owing  to  the  payments  that  Amer- 
ica had  to  make,  and  would  be  scarce,  owing  to  the 
fact  that  her  staple  exports  would /not,  at  that  time, 
be  coming  forward  freely.  Consequently  the  spir- 
ited bidding  of  those  who  had  payments  to  make 
in  Europe  would  force  the  price  of  Bills  on  London 
up  and  the  Rate  of  Exchange  would  tend  to  rise 
above  the  parity  price.  This  tendency  would  be 
met  and  coped  with  to  a  great  extent  by  the  creation 
of  bills,  not  against  any  actual  shipment  of  produce, 
but  through  credit  arrangements  between  New 
York  and  London.  By  arrangement  between  Amer- 
ican and  English  bankers,  American  bankers  would 
draw  Bills  on  their  London  correspondents,  which 
Bills  represented  in  fact  a  loan  from  the  English 
firm  to  the  American. 

By  this  means,  at  a  time  when  Bills  on  London 
were  wanted  in  New  York,  they  were  called  into 
being  by  the  credit  machinery  and  so  steadied  the 
Rate  of  Exchange  by  increasing  the  supply  of  Bills 
at  a  time  when  they  were  scarce,  and,  artificially 
but  most  efficaciously,  met  the  needs  of  those  who 
had  remittances  to  make  to  London.  In  effect  New 
York  was  shipping  promises  to  pay  instead  of  goods 
and  so  filling  the  gap  in  the  Exchange  market. 

When  the  autumn  came  and  the  shipping  of 
America's  produce  brought  a  flood  of  cotton  and 


INTERNATIONAL  CURRENCY         145 

wheat  Bills  into  the  market,  the  Rate  of  Exchange 
would  tend  to  fall  rapidly  and  the  same  credit 
operation  which  had  steadied  the  upward  market 
in  the  early  part  of  the  year  would  steady  its  relapse 
in  the  last  four  months,  because  the  New  York 
bankers  who  had  created  Bills  on  credit  to  meet  the 
demand  in  the  early  part  of  the  year  would  now 
have  to  buy  Bills  to  a  corresponding  amount  and 
send  them  to  their  London  correspondents  to  pay 
the  debts  thus  contracted. 

A  concrete  example  always  makes  these  things 
clearer.  We  will  suppose  that  in  May,  when  the 
first  flight  of  American  visitors  to  Europe  is  be- 
ginning to  increase  the  demand  for  payments  from 
New  York  to  London,  the  Rate  of  Exchange  goes 
up  to  |4.88^ ;  then  an  American  firm  draws  Bills 
for  a  quarter  of  a  million  sterling  on  various  Lon- 
don correspondents,  supplies  the  demand  in  New 
York  of  those  who  have  European  payments  to 
make  and  keeps  the  Rate  of  Exchange  from  rising 
too  rapidly.  In  September,  when  the  wheat  har- 
vest and  the  cotton  crop  are  beginning  to  produce 
the  usual  flood  of  Bills  on  London  and  the  Exchange 
has  gone  down  to  $4.85  >4,  the  New  York  firm  is 
able  to  buy  up  Bills  on  London  for  a  quarter  of  a 
million,  so  again  steadying  the  Rate  of  Exchange 
and  preventing  a  further  fall,  and  ships  the  Bills 
to  its  London  correspondents,  so  redeeming  the 
debt. 

Finance  Bills  of  this  kind,  drawn  in  anticipation 
of  the  usual  seasonal  movements  of  trade,  thus 


146         THE  BUSINESS  OF  FINANCE 

provided  a  very  real  benefit  to  merchants  and  others 
who  have  payments  to  make,  by  narrowing  the  fluc- 
tuations in  Rates  of  Exchange,  and  they  also  pro- 
vided international  banking  with  profits,  which, 
however,  were  cut  extremely  fine  by  the  keenness 
of  competition. 

Like  most  of  the  other  ingenious  devices  of 
finance  this  arrangement  was  liable  to  abuse,  for 
international  banking  houses,  having  discovered 
how  easily  and  comfortably  Bills  could  be  drawn 
on  one  another's  credit  and  discounted  in  the  finan- 
cial centres  of  the  world,  sometimes  made  use  of 
these  facilities  for  the  financing  of  operations,  such 
as  Stock  Exchange  speculation,  which  could  not  be 
counted  on  with  the  same  confidence  as  the  move- 
ments of  the  harvests.  Sometimes  also  they  used 
them  for  purposes,  such  as  the  provision  of  fixed 
capital  for  industry,  which  was  an  abuse  of  the 
Bill  of  Exchange,  the  justification  for  which  is  a 
shipment  of  goods  coming  forward  for  consumption, 
or  the  provision  of  services,  now  or  in  the  immedi- 
ate future. 

Apart  from  this  liability  to  err  which  is  shared 
by  most  human  institutions,  the  machinery  of  Ex- 
change was  carried  on  with  extraordinary  eflftciency, 
and  by  far  the  greater  part  of  the  world's  exchanges 
of  goods  and  services  was  thus  financed  by  cur- 
rencies specially  created  for  each  transaction  and 
cancelled  when  the  transaction  was  over  and  the 
Bill  had,  as  the  phrase  was,  "paid  itself,"  by  the 
selling  of  goods. 


INTERNATIONAL  CURRENCY         147 

There  were  times,  however,  when  even  with  the 
help  of  finance  Bills  specially  created  to  fill  the 
seasonal  gap,  the  demand  for  Bills  ran  so  far  ahead 
of  the  supply  that  shipments  of  gold  became  neces- 
sary. This  happened  when  the  Rate  of  Exchange, 
that  is  to  say,  the  price  of  Bills,  rose  or  fell  to  such 
a  point  that  gold  became  the  cheaper  form  of  re- 
mittance. To  go  back  to  our  London  and  New  York 
example,  if,  in  the  early  months  of  the  year  the  de- 
mand for  remittances  to  London  forced  the  price 
in  New  York  up  to  |4.88Mj  then  it  was  cheaper  to 
send  gold,  since  the  cost  of  shipment  was  then 
usually  less  than  the  difference  between  this  Rate 
and  the  parity  price  of  $4.86.6. 

Books  on  Foreign  Exchange  continually  talk  as 
if  those  who  had  payments  to  make  in  London 
would  calculate  for  themselves  the  difference  be- 
tween the  price  at  which  they  could  buy  the  Bill 
on  London  and  the  terms  on  which  they  could  ship 
gold.  As  a  matter  of  practical  fact  the  shipment 
of  gold  was  chiefly  in  the  hands  of  experts  pro- 
vided with  the  highly  technical  knowledge  required 
for  this  complicated  business.  They,  when  the  Rate 
of  Exchange  went  up  to  what  is  called  "gold  point,'' 
that  is  to  say,  the  price  at  which  a  shipment  of  gold 
is  the  cheaper  form  of  remittance,  would  them- 
selves send  gold  across  and  so,  by  making  this  actual 
shipment  of  valuable  produce,  would  have  a  claim 
upon  London  to  sell,  and  so  would  be  in  a  position 
to  feed  the  demand  of  those  who  wanted  to  buy 
remittances. 


148         THE  BUSINESS  OF  FINANCE 

The  same  process  would  happen  on  the  other 
side  of  the  account  in  the  autumn  months,  when 
Bills  on  London  were  too  plentiful  to  be  absorbed 
by  the  normal  demand  on  the  part  of  those  who 
had  remittances  to  make.  When  the  price  went 
down  to  the  importing  gold  point,  it  would  pay 
those  accustomed  to  the  business  of  shipping  gold 
to  bring  gold  across  to  America,  buying  Bills  on 
London  in  the  New  York  Exchange  market  to  pro- 
vide them  with  the  means  of  paying  for  it. 

Fluctuations  in  the  Exchange  were  thus  origi- 
nally and  chiefly  based  on  the  international  ex- 
changes of  goods  and  services,  but,  as  we  have  seen, 
they  were  complicated,  checked  and  modified  by 
the  machinery  of  credit,  which  brouglit  Bills  into 
being  when  they  were  wanted  and  produced  a  de- 
mand for  them  when  they  were  plentiful.  These 
credit  operations  were  also  employed  to  check  gold 
movements,  when  they  arrived  at  a  point  which  the 
exporting  country  considered  inconvenient,  by  stim- 
ulating the  export  of  promises  to  pay. 

For  example,  when  the  course  of  Exchange  was 
against  London  in  the  autumn  season,  it  was  cus- 
tomary for  the  Bank  of  England  to  raise  the  Rate 
of  discount  current  in  London  by  putting  up  its 
own  official  Rate  and  taking  measures,  if  neces- 
sary, to  bring  the  market  Rate  up  after  it,  the 
market  Rate  being  the  Rate  at  which  Bills  could 
be  discounted  by  the  London  bill  brokers.  The 
effect  of  thus  raising  the  Rate  of  discount  in  Lon- 
don would  be  that  American  bankers  and  others 


INTEKNATIONAL  CURRENCY         149 

who  had  control  of  the  funds  which  the  American 
shipments  of  produce  were  putting  into  American 
hands,  would  be  inclined  to  leave  these  funds  in 
London  instead  of  selling  Bills  against  them  in  the 
Exchange  market  in  New  York  and  so  depressing 
the  rate  of  exchange  in  New  York  towards  "gold 
point."  For  example,  a  New  Orleans  banker,  being 
in  possession  of  a  large  number  of  Bills  on  London, 
produced  by  shipments  of  cotton  made  by  his  cus- 
tomers to  England,  would,  if  the  rate  of  discount 
in  London  were  raised  from  4  to  5%,  be  less  inclined 
to  turn  his  Bills  into  cash,  because,  owing  to  the  rise 
in  the  rate  of  discount,  he  would  get  less  cash  for 
them.  Consequently,  he  would  be  inclined  to  hold 
the  bills  as  an  investment  instead  of  turning  them 
into  cash  and  selling  sight  drafts  against  them ;  and 
the  market  in  Exchange  would  be,  to  that  extent, 
steadied.  At  the  same  time  American  dealers  in 
money  would  be  encouraged  to  buy  bills  payable 
at  sight,  so  putting  themselves  in  funds  in  London, 
and  investing  the  proceeds  in  London's  discount 
market. 

By  these  means,  by,  in  effect,  raising  the  rate 
that  the  London  market  was  prepared  to  pay  for 
money,  foreign  holders  of  claims  on  London  would 
be  discouraged  from  presenting  them  and  foreign 
holders  of  money  would  be  encouraged  to  make 
remittances  to  London  in  order  to  take  advantage 
of  the  higher  Rate. 

Apart  from  this  power  of  attracting  foreign 
money  by  changes  in  the  ruling  Rate  of  discount, 


160        THE  BUSINESS  OF  FINANCE 

creditor  countries  such  as  England  and  France  be- 
fore the  war  were  able,  at  any  time,  to  turn  the 
Exchanges  of  the  world  in  their  favour  by  calling 
in  money  that  they  had  lent  to  other  countries  or 
simply  by  ceasing  to  invest  abroad. 

As  we  saw  above  in  our  examination  of  Eng- 
land's account  with  her  foreign  customers,  she  had 
an  annual  surplus  in  her  favour,  resulting  from  her 
exchange  of  goods  and  services  with  the  rest  of  the 
world,  of  something  like  200  millions  sterling  which 
she  used  to  Invest  in  foreign  countries.  If  she  chose 
to  stop  this  process,  which  those  in  charge  of  her 
monetary  machine  could  encourage  her  to  do  by 
raising  the  rate  of  interest  at  home,  the  Exchanges 
of  the  world  would  tend  inevitably  to  move  in  her 
favour.  If,  as  happened  at  the  beginning  of  the 
■war,  she  not  only  stopped  the  process  of  investing 
abroad,  but  called  in  all  the  short  credits  which  she 
had  outstanding  in  foreign  countries,  the  Exchanges 
of  the  world  went  in  her  favour  with  such  a  mighty 
rush  that  they  broke  the  machinery. 

Countries  which  are  not  in  this  comfortable  posi- 
tion have  devised  an  ingenious  means  for  being 
able  to  regulate  the  Exchanges  when  they  move 
against  them,  by  the  establishment  of  what  is  called 
"a  gold  exchange  standard."  Under  this  system 
the  country  either  keeps  a  balance  in  some  impor- 
tant foreign  centre  or  keeps  in  its  own  hands  a 
steadily  maintained  store  of  claims  upon  some  for- 
eign centre.  For  example,  before  the  war  it  was 
customary  for  the  Austrian  State  Bank  continually 


INTERNATIONAL  CURRENCY         151 

to  hold  a  large  amount  of  Bills  on  London.  If  the 
Exchange  between  Vienna  and  London  went  in 
favour  of  the  latter  more  rapidly  than  seemed  con- 
venient to  the  former,  the  State  Bank  could  check 
the  movement  by  supplying  the  market  with  ster- 
ling Bills. 

India  and  Brazil  used  to  keep  large  balances  in 
London  with  a  view  to  the  same  object,  that  is  to 
say,  the  power  of  drawing  upon  these  balances  and 
so  providing  the  local  market  in  Bombay  or  Rio 
de  Janeiro  with  Bills  on  London  if  there  were  too 
great  a  scarcity  of  them.  Mexico  kept  a  balance 
in  New  York  for  the  same  reasons.  The  system 
works  admirably  in  normal  times,  and  as  long  as 
the  balance  of  trade  does  not  go  too  violently 
against  the  country  which  employs  it,  and  as  long 
as  the  country's  credit  is  good  enough  to  enable 
finance  bills  to  be  created,  if  necessary,  to  fill  the 
gap.  It  broke  down,  however,  in  Mexico  when 
plunged  in  Civil  War,  so  that  her  power  of  export 
was  diminished  and  her  credit  was  impaired. 

It  is  not  a  panacea  for  Exchange  diseases  and 
no  panacea  against  these  ills  can  be  invented  for 
a  country  which  outruns  the  constable  beyond  a 
certain  point,  but  it  is  a  highly  useful  and  beneficial 
system  when  carefully  regulated.  By  its  means 
the  Government  is  able  to  fix  a  local  Rate  of  Ex- 
change and  maintain  it  within  reasonable  limits 
by  the  sale  and  purchase  of  drafts  as  occasion  may 
demand.  The  system,  in  fact,  has  worked  so  well 
for  small  and  financially  dependent  countries  that 


152         THE  BUSINESS  OF  FINANCE 

it  has  been  suggested  that  it  might  be  adopted  with 
advantage  by  the  leading  financial  countries  such 
as  America,  England  and  France,  that  their  Gov- 
ernments should  establish  substantial  balances  with 
one  another  and  with  other  countries  and  should 
take  over  the  whole  machinery  of  international  re- 
mittance. 

Some  even  go  so  far  as  to  suggest  that  some 
sort  of  international  Bank  Note  should  be  invented 
and  that  the  golden  idol  should  be  knocked  off  its 
pedestal  and  handed  over  to  be  used  up  by  jewel- 
lers, picture  framers  and  dentists.  It  seems  to  me 
that  there  are  many  objections  to  these  rather  ideal- 
ist proposals.  Until  we  have  abolished  war  no 
country  would  care  to  have  a  large  balance  in  any 
centre  where  it  might  be  liable  to  sequestration  if 
war  happened  to  break  out. 

The  suggestion  that  the  machinery  of  interna- 
tional remittance  should  be  put  into  the  hands  of 
Government  calls  up  a  vision  full  of  shuddering 
horror,  of  red  tape,  forms  to  be  filled  in  and  delays 
and  circumlocution  which  might  be  a  very  serious 
drag  on  business.  It  is  also  very  safe  to  expect,  at 
least  from  previous  experience  of  English  enterprise 
as  managed  by  Government,  that  the  business  would 
be  carried  on  at  a  loss,  at  the  expense  of  the  tax- 
payers of  the  countries  involved.  Nevertheless, 
there  is  much  to  be  said  for  closer  co-operation  be- 
tween the  great  financial  centres  of  the  Eastern 
and  Western  hemisphere,  and  a  beginning  in  this 
direction  has  already  been  made  by  the  knitting  of 


INTERNATIONAL  CURRENCY         153 

closer  relations  between  the  Federal  Reserve  Board 
of  the  United  States  and  the  Bank  of  England  in 
London. 

If,  and  when,  a  league  of  nations  has  been  formed 
and  formally  established  it  may  perhaps  be  possible 
to  consider  the  establishment  of  some  international 
form  of  paper  currency  which  will  pass  all  over  the 
world  or  at  least  in  those  countries  included  in  the 
league;  but  the  difficulties  involved  by  such  a  sys- 
tem are  so  great  and  there  are  so  many  unavoidable 
difficulties  ahead,  to  be  faced  in  the  period  of  re- 
construction, that  it  seems  unwise  to  add  to  them 
by  turning  loose  the  international  currency  re- 
former. 


CHAPTER    VIII 

INVESTMENT  ABROAD 

When  the  investor  sends  his  money  abroad  he, 
as  a  general  rule,  takes  greater  risks  and  expects 
to  earn  a  higher  rate  of  interest  or  of  profit  on  his 
investment.  The  more  enterprising  the  nature  of 
the  operation  involved  by  sending  money  to  fer- 
tilize the  uttermost  parts  of  the  earth,  the  greater 
is  the  responsibility  thrown  upon  the  financial  lead- 
ers who  handle  the  business.  With  a  view  to  the 
eternal  craving  of  the  ordinary  man  for  short-cuts 
to  fortune,  it  follows  that  the  more  easily  he  is 
tempted  to  send  money  over-sea,  the  more  care  has 
to  be  taken  by  those  who  provide  investment  in 
Loans  and  Companies  abroad  and  gather  in  money 
from  their  fellow-countrymen  to  finance  them. 

Many  people  think  that  when  the  war  is  over  very 
little  investment  abroad  will  be  done  by  any  of  the 
great  lending  countries  for  some  years  to  come. 
This  belief  is  based  on  the  expectation  that,  in  the 
first  place,  there  will  be  a  great  scarcity  of  capital 
as  compared  with  the  demand  for  it  for  the  devel- 
opment of  home  industries  in  all  countries;  that, 
in  the  second,  the  investor,  after  the  experiences  of 

154 


INVESTMENT     ABROAD  155 

the  present  war  on  the  part  of  those  who  have  been 
unfortunate  enough  to  have  had  money  invested  in 
enemy  countries,  will  prefer  henceforward  to  keep 
his  money  at  home;  and  that,  in  the  third  place, 
official  regulation  will  exercise  strict  control  over 
the  issue  of  foreign  securities  in  the  great  money- 
lending  centres. 

None  of  these  assumptions  is  necessarily  true. 
It  is  quite  probable  that  each  of  them  may  exercise 
a  certain  amount  of  influence,  but  to  expect  that 
they  will  be  strong  enough  altogether  to  dam  the 
stream  of  foreign  investment  is  perhaps  too  sweep- 
ing an  assumption. 

With  regard  to  Number  1,  it  is  certainly  true 
that  in  all  the  great  money-lending  countries  there 
is  a  great  deal  of  work  at  home  clamouring  to  be 
done,  but  being  held  up  by  the  demands  on  the 
money  market  for  war  purposes,  and  it  is  very 
likely  true  that  the  demand  for  capital  for  these 
home  purposes  will  come  first,  either  owing  to  sen- 
timent or  to  regulation,  before  the  outward  flow 
of  capital  is  resumed. 

On  the  other  hand,  the  assumption  that  capital 
will  necessarily  be  very  scarce  after  the  war  is  one 
that  remains  to  be  proved.  Capital  after  all,  as 
has  been  pointed  out  in  an  earlier  chapter,  is  merely 
the  margin  of  current  production  which  is  avail- 
able for  the  equipment  of  industry  after  the  immedi- 
ate needs  of  the  population  have  been  satisfied, 
and  if,  as  is  quite  possible,  the  industrial  lessons 
of  the  war  are  well  and  truly  learnt  and  the  im- 


156         THE  BUSINESS  OF  FINANCE 

proved  organisation  and  efiSciency  are  made  use  of 
in  order  to  promote  a  great  increase  in  the  output 
of  goods  for  peace  purposes,  and  if,  at  the  same 
time,  the  needs  of  the  community  for  immediate 
consumption  are  still  modified  by  the  austere  ideals 
set  up  by  the  war,  then  it  is  quite  possible  that  the 
supply  of  capital  may  be  very  considerable;  and 
that  it  may  be  actually  encouraged  to  go  abroad 
both  officially  and  unofficially,  in  order  to  stimu- 
late the  purchasing  power  of  the  more  backward 
countries,  as  necessarily  follows  when  capital  is 
being  placed  freely  abroad.  In  other  words,  when 
the  creditor  countries  lend,  their  financiers  lend, 
in  effect,  the  goods  which  their  industrial  machin- 
ery is  producing.  The  more  the  financiers  lend,  the 
keener  is  the  demand  for  the  commodities  pro- 
duced by  industry,  because  the  borrowing  countries 
are  thus  able  to  supply  themselves  with  commodi- 
ties, giving  in  payment  the  money  invested  by  the 
financiers  in  the  borrowers'  promises  to  pay  some 
day.  A  foreign  Government  sells  its  bonds  to  our 
investors  and  uses  our  investors'  money  to  pay  for 
imported  goods. 

As  to  Number  2,  the  reluctance  of  investors  to 
go  abroad  after  the  experiences  of  the  present  war, 
this  will  certainly  be  a  very  strong  bar  to  over-seas 
investment  if  the  war  should  end  in  such  a  way 
that  there  is  any  likelihood,  or  even  possibility,  of 
its  recurrence.  Unfortunate  English  shareholders, 
for  example,  in  the  Imperial  Continental  Gas  Com- 
pany will  have  had  reason  to  be  sorry  that  they 


INVESTMENT  ABEOAD  157 

made  what,  at  the  time,  looked  like  a  very  judicious 
investment.  The  Company  was  one  of  the  most 
successful  and  best  managed  in  the  world  and  its 
stock  used  to  pay  a  regular  dividend  of  9%  and 
stand  at  a  very  high  premium.  Unfortunately  for 
its  shareholders  one  of  the  most  successful  parts 
of  the  Company's  enterprise  was  the  gas  that  it 
supplied  to  the  City  of  Berlin  and  other  German 
towns;  consequently,  since  the  war  broke  out,  the 
Company  has  been  unable  to  bring  home  a  consid- 
erable proportion  of  its  revenue,  and,  in  spite  of 
the  very  great  financial  strength  that  it  had  built 
up  during  many  years  of  well  conducted  enterprise 
before  the  war,  its  shareholders  have  received  no 
dividend  since  May,  1915. 

If,  then,  the  war  ends  with  conditions  of  diplo- 
macy and  international  politics  which  mak^  any 
repetition  of  the  present  barbarism  possible,  it  will 
be  the  natural  instinct  of  most  cautious  investors 
to  keep  their  money  at  home,  or  at  least  only 
to  place  it  in  countries  with  which  they  believe 
their  own  nation  can  never,  by  any  possibility, 
quarrel. 

If,  on  the  other  hand,  as  we  all  hope,  the  present 
war  ends  in  such  a  way  that  the  danger  of  conflict 
on  such  a  scale  is  made  definitely  impossible  for 
the  future,  and  if,  at  the  same  time,  there  is  a  great 
development  in  international  amity  and  co-opera- 
tion, it  seems  probable  that  there  will  be  a  great 
movement  in  the  direction  of  freer  interchanges  of 
commodities  and  services  between  the  nations  and 


158         THE  BUSINESS  OF  FINANCE 

consequently  of  an  expansion  of  international  in- 
vestment. 

With  regard  to  Number  3,  the  official  regulation 
of  investment  at  home  and  abroad,  that  certainly 
seems  to  be  inevitable  for  a  time.  In  all  the  coun- 
tries that  now  have  been  long  at  war  business  men 
of  all  kinds,  financiers,  industrialists,  and  com- 
mercial men,  seem  to  be  fairly  unanimous  in  hoping 
that  the  restrictions  in  control,  with  which  they 
have  struggled  during  the  course  of  the  war,  will 
be  removed  as  soon  as  possible,  but,  with  regard 
to  one  matter  there  seems  to  be  an  overwhelming 
necessity  for  regulation  for  some  time  after  the 
war  and  that  is  with  regard  to  imports. 

Problems  of  exchange  seem  to  be  likely,  when 
the  war  is  over,  to  be  so  important,  at  least  among 
those  countries  which  have  any  regard  to  their 
financial  prestige  abroad,  that  it  will  be  hardly 
possible  for  the  State  to  throw  the  door  wude  open 
and  to  say  that  goods  are  to  be  poured  into  the 
country  as  fast  as  those  who  have  money  to  spend 
choose  to  spend  it  upon  them,  without  any  regard 
to  the  desirability  of  the  kind  of  goods  that  the 
private  buyer  is  importing. 

With  regard  to  visible  goods  this  need  for  reg- 
ulation will  be  emphasised  by  the  scarcity  of  ship- 
ping space  that  seems  likely  to  produce  a  difficult 
problem  when  the  war  is  over. 

Invisible  imports,  such  as  promises  to  pay,  are 
not  affected  by  this  part  of  the  problem,  but  they 
will  have  a  very  considerable  effect  upon  exchange 


INVESTMENT  ABKOAD  159 

and  may  therefore  be  considered  likely  to  remain 
for  some  time  under  official  or  semi-official  con- 
trol. The  commonly  used  phrase,  "the  export  of 
capital,'^  is  perhaps  rather  likely  to  mislead  the 
careless  observer  as  to  what  really  happens  when 
the  lending  country  makes  an  advance  to  an  over- 
pea  borrower.  The  promises  to  pay,  which  are  the 
tangible  expression  of  the  capital  lent,  are  not  ex- 
ported but  imported,  and  if  we  think,  not  of  ex- 
port of  capital  but  of  import  of  securities,  it 
thus  becomes  clear  the  process  of  investment 
abroad,  which  implies  the  importing  of  securi- 
ties, necessarily  has  the  same  effect  upon  the 
country's  exchange  as  any  other  import,  namely, 
turning  the  exchange  against  the  importing 
country. 

For  example,  if  Brazil  exports  one  million 
pounds'  worth  of  Brazilian  Bonds,  representing  a 
loan  which  is  being  granted  by  England  to  Brazil, 
the  effect  of  the  operation  is  that  England  has  to 
psij  Brazil  a  million  or  place  a  million  at  Brazil's 
disposal.  Brazil  has  Bills  on  England  for  a  mil- 
lion to  sell  and  this  sale  would  tend  to  turn  the 
exchange  in  favour  of  Brazil  and  against  England. 
For  these  reasons  it  may  be  that  in  the  case  of 
those  countries  which  make  it  a  point  of  honour 
to  pay  attention  to  the  question  of  the  Rate  of  Ex- 
change and  to  financial  prestige,  regulation  of  over- 
seas investments  may  be  desirable  from  this  point 
of  view,  at  any  rate  in  the  difficult  first  few  months 
that  may  follow  the  end  of  the  war;  and  it  is  also 


160         THE  BUSINESS  OF  FINANCE 

possible  that  if  the  demands  of  home  enterprise 
for  capital  are  insistent  and  unsatisfied,  political 
and  other  pressure  may  be  brought  to  bear  upon  the 
Governments  so  that  the  needs  of  the  home  market 
for  capital  may  be  supplied  first.  Nevertheless, 
it  will  probably  soon  be  recognised  that  in  order  to 
join  freely  in  the  great  international  trade  move- 
ment which  may,  if  all  goes  well,  follow  the  end 
of  the  war,  it  will  be  necessary  for  every  nation  to 
put  as  little  bar  as  possible  upon  the  free  import 
of  securities,  and,  as  has  been  pointed  out  above, 
since  it  is  quite  possible  that  the  supply  of  capital 
may  be  much  freer  than  is  expected  in  certain  quar- 
ters, the  need  for  official  regulation  may  soon  be 
brought  to  an  end  by  the  weight  of  purely  economic 
factors. 

It  thus  appears  that  the  expected  suspension 
of  foreign  investment  when  the  w^ar  is  over  is  based 
on  assumptions,  none  of  which  are  certain  and  all 
of  which,  though  they  may  perhaps  be  called  prob- 
able, are  not  likely  to  last  long.  If  this  be  so,  it 
follows  that  those  who  handle  the  machinery  of 
finance  will  soon  be  busy  again  on  this  most  diffi- 
cult and  responsible  part  of  their  work,  namely, 
the  provision  of  capital  for  foreign  countries  from 
those  in  which  more  is  saved  than  is  required  for 
home  purposes. 

It  is  sometimes  contended  that  the  creditor  coun- 
tries in  the  past,  especially  France  and  England, 
have  developed  this  business  of  international  in- 
vestment at  the  expense  of  those  who  wanted  and 


INVESTMENT  ABROAD  161 

could  not  get  capital  for  use  at  home;  and  it  is 
argued  that  what  happened  before  the  war  is  an 
additional  reason  for  the  continuance,  not  for  a 
time  only,  but  for  all  time,  of  official  regula- 
tion of  capital  issues,  so  that  money  which 
might  be  used  at  home  shall  not  go  abroad,  but 
shall  stay  at  home  and  cheapen  the  supply  for 
home  use. 

This  subject  is  extremely  complicated  and  diffi- 
cult, because  it  is  so  closely  associated  with  prob- 
lems of  international  politics  that  it  is  difficult  to  re- 
gard it  from  the  purely  economic  point  of  view. 
In  fact,  it  is  not  possible  or  desirable  so  to  regard 
it.  We  have  to  look  at  these  things  from  the  point 
of  view  of  international  interest. 

It  is  perfectly  true  that  when  we  lend  money  to 
other  countries  we  assist  their  development  and 
stimulate,  in  the  first  place,  their  demand  for  goods, 
which  it  is  at  least  probable  that  we  shall  be  asked 
to  supply,  and  afterwards  their  demand  for  labour, 
which  tends  to  help  the  process  of  emigration  by 
which  we,  in  England,  have  in  the  last  century  lost 
so  many  valuable  citizens.  It  is  at  least  possible  that 
if  we  had  lent  less  money  abroad,  our  home  indus- 
tries would  have  been  more  cheaply  supplied  with 
capital  and  might  therefore  have  been,  by  this  time, 
on  a  more  extensive  scale,  employing  a  larger  vol- 
ume of  labour.  On  the  other  hand,  if  our  capital 
had  not  gone  abroad  to  fertilise  the  uttermost  parts 
of  the  earth,  the  development  of  the  total  out- 
put of  mankind's  material  energy  would  have  been 


162        THE  BUSINESS  OP  FINAKCE 

much  slower  and  the  volume  of  goods  continually 
poured  into  this  country  for  the  food  and  enjoy- 
ment of  its  inhabitants  would  have  been  very 
much  less. 
-^  By  our  international  investment  policy  before 
the  war  we  helped  to  produce  all  kinds  of  goods 
all  over  the  world  in  places  in  which  they  could  be 
produced  most  freely  and  cheaply.  Consequently 
in  our  time  of  need  we  were  able  to  draw  upon  the 
rest  of  the  world  to  supply  us  with  things  that  we 
wanted  for  the  war.  Against  which  the  opponents 
of  the  system  can  always  reply  that  if  we  had  not 
sent  so  much  capital  abroad  we  should  have  been 
in  a  position  to  rely  much  more  on  ourselves  and 
much  less  on  our  over-seas  sources  of  supply  and 
consequently  we  should  have  been  much  less  vul- 
nerable by  the  attacks  of  the  submarine.  We  might 
not  have  had  such  large  contingents  coming  to  our 
help  from  the  Dominions,  but  we  might  have  been 
able  to  produce  a  larger  population  at  home  ready 
to  go  into  the  firing  line.  Perhaps,  but  when  we 
remember  how  much  virgin  soil  has  been  opened  up 
in  the  last  century  by  our  investments  abroad  we 
have  to  acknowledge  that  without  them  there  would 
have  been  much  less  production  and  consequently 
much  fewer  people  in  existence  and  bound  to  us  by 
trade  relations. 

This  is  a  question  which  can  be  argued  round 
indefinitely  It  becomes  finally,  like  a  currency 
problem  or  a  religious  conviction,  almost  a  matter 
of  belief,  concerning  which  demonstration  by  argu- 


INVESTMENT  ABROAD  163 

ment  is  impossible.  But  at  least  it  may  be  pointed 
out  that  the  experiences  of  the  present  summer* 
show  that  we  might,  if  we  had  tried  to  bring  up  a 
larger  population  on  our  own  resources,  have  been 
liable  to  natural  and  seasonal  reverses  which  might 
have  been  almost  as  unpleasant  in  their  conse- 
quences as  the  submarine. 

The  question  we  have  to  decide  is  whether  it  is 
better  for  each  nation  to  do  as  much  as  it  can  and 
grow  as  much  as  it  can  for  itself  within  its  own 
borders,  or  to  reach  out  the  largest  possible  number 
of  tendrils  and  branches  all  over  the  world,  so  as  to 
get  as  much  nourishment  as  possible  from  foreign 
soils  and  to  make  as  many  connections  as  may  be 
with  foreign  consumers  and  customers.  Once  again 
we  find  that  the  end  of  the  war,  the  way  in  which 
this  war  ends,  will  go  a  long  way  towards  answering 
the  question. 

If  it  ends  in  the  wrong  way,  to  be  followed  first 
by  a  pause  of  exhaustion  and  then  by  a  period  of 
hasty  armament  and  then  by  another  war,  with  all 
the  present  weapons  of  destruction  very  much 
more  efficient  and  destructive,  in  that  case  it  is 
almost  idle  to  consider  about  any  of  these  eco- 
nomic problems,  for  the  only  problem  before  any 
nation  will  be,  how  to  make  itself  all  sting,  so  as 
to  be  able  to  join  most  efficiently  in  the  great 
stinging  match  which  will  destroy  such  civilisation 
as  now  exists. 

If  President  Wilson's  League  of  Nations  is  real- 

*  Written  in  1917. 


164        THE  BUSINESS  OF  FINANCE 

ised  into  such  a  shape  as  many  quite  practical  peo- 
ple are  now  sketching  in  their  dreams,  then  it  would 
seem  that  all  the  old-fashioned  contentions  in  fa- 
vour of  the  utmost  economic  freedom  and  the  read- 
iest possible  movement  of  capital,  goods,  services, 
ideas  and  men  from  one  country  to  another  will 
have  come  back  to  their  old  strength  and  much  more 
than  their  old  strength. 

The  weakness  of  the  economic  argument,  that 
whatever  was  best  for  the  economic  progress  of 
mankind  and  for  the  greatest  possible  increase  in 
the  world's  material  output  was  also  best  for  any 
individual  nation  which  had  any  part  in  interna- 
tional trade,  was  based  upon  the  fact  that  there 
was  always  danger  of  a  rupture  of  the  whole  eco- 
nomic machine  by  some  ridiculous  barbarism  in  the 
shape  of  war  initiated  by  some  ambitious  potentate. 
If  we  are  to  be  quit  of  this  danger  in  future  and 
mankind  is  to  be  free  to  develop  the  resources  of 
the  world  in  the  places  and  in  the  manner  that  is 
most  convenient  and  conducive  to  their  output, 
then  the  international  ideal  which  has  served  men 
so  well  for  many  centuries,  by  lifting  them  out  of 
themselves  and  their  own  petty  interests  into  some- 
thing wider,  will  begin  to  look  very  narrow  and 
parochial  by  the  side  of  the  great  world-wide 
ideal  which  President  Wilson  has  put  before  the 
world  as  the  thing  to  be  achieved  by  the  present 
war. 

If  this  be  so,  then  it  is  the  business  of  those  who 
manage  the  machinery  of  finance  to  take  good  care, 


INVESTMENT  ABROAD  165 

working  with  the  experience  of  the  past,  that  in- 
ternational investment  shall  be  free  in  the  future 
from  the  dark  stains  that  have  marked  its  past 
career.  Properly  conducted  international  finance 
is  a  very  strong  power  for  good.  Its  effect  is  that 
the  citizens  of  one  country  get  a  good  investment, 
and  that  the  citizens  of  another  country  get  re- 
sources that  they  need  in  order  to  develop  its  pro- 
ductive power.  Thereby  the  total  output  of  the 
world's  material  goods  is  increased,  and  the  power 
of  mankind  to  produce  and  enjoy  the  good  things 
of  the  earth  is  multiplied. 

On  the  whole,  international  finance  can  claim 
that  its  work  has  been  clean  and  beneficial.  If  it 
had  not  been  so  it  could  not  have  gone  on,  because 
it  is  continually  tried  by  the  strictly  material,  but 
nevertheless  searching,  test  of  its  ability  to  pay 
both  the  parties  who  engage  in  it.  It  might  be  that 
this  test  might  in  some  cases  be  applied,  and  sur- 
vived, although  at  the  same  time  there  might  be 
moral  considerations  which  would  still  leave  a  scep- 
tical critic  unsatisfied.  But  these  things  cannot 
happen  often  or  continuously.  Unless  the  exchange 
of  capital  between  nations  is,  on  the  whole,  and  in 
the  long  run,  beneficial  to  both  parties  there  is  no 
reason  why  either  of  them  should  engage  in  it.  The 
test  is  constantly  applied  by  which  finance  is  asked 
— Has  this  application  of  capital  produced  that 
increase  in  the  output  of  material  goods  which  is 
its  economic  justification?  If  it  has  not,  then  the 
necessary  resources  for   meeting  the  interest  or 


166        THE  BUSINESS  OF  FINANCE 

profit  on  the  capital  applied  will  not  be  forthcom- 
ing. Either  the  lender  will  have  to  go  without 
his  interest,  or  the  borrower  will  find  himself  hard 
put  to  it  to  pay  it.  Whenever  it  is  found  tliat  the 
lender  and  the  borrower  are  both  satisfied,  we  may 
be  certain  that  the  material  goods  which  are  re- 
quired to  provide  interest  on  capital  invested  have 
been  delivered. 

Nevertheless,  though  on  the  whole  there  can  be 
no  doubt  that  international  finance  has  done  enor- 
mous service  in  quickening  mankind's  production 
and  enjoyment  and  in  uniting  the  whole  world  into 
one  great  cosmopolitan  market,  it  is  equally  cer- 
tain that  many  grave  errors  have  been  committed 
in  the  past  in  this  process  of  the  international 
exchange  of  capital,  and  now  that  the  whole  finan- 
cial machine  is  working  under  very  close  and  crit- 
ical scrutiny,  it  is  very  desirable  to  make  use  of 
these  lessons  of  the  past  to  avoid  similar  scandals 
in  the  future. 

If  we  are  about  to  build  a  new  world  and  make 
a  fresh  start  in  most  departments  of  life,  it  is  es- 
sential that  those  who  handle  capital  should  see 
that  it  is  well  and  cleanly  used;  or  we  are  only 
too  likely  to  find  the  whole  business  handed  over 
to  Government  Departments,  with  the  lamentable 
results  that  may  be  expected  when  Government  offi- 
cials are  asked  to  do  anything  outside  their  usual 
routine. 

Great  as  is  the  power  of  good  finance  for  good, 
the  power  of  bad  finance  for  rottenness,  both  in 


INVESTMENT  ABROAD  167 

the  borrowing  country  and  in  the  lender,  is  almost 
unlimited.  In  the  case  of  the  lender,  when  ques- 
tionable securities  are  handled  and  offered  to  the 
public,  the  business  will  be  done  by  third-rate  firms, 
because  firms  of  high  standing  would  not  touch 
it,  and  the  methods  of  third-rate  firms  are  likely 
to  be  more  than  questionable.  Big  underwriting 
commissions,  extravagant  advertising  in  the  press, 
perhaps  a  certain  amount  of  actually  corrupt  puff- 
ing, market  manoeuvres,  all  the  machinery,  in  short, 
by  which  bad  wares  are  placed  upon  a  greedy  and 
gullible  public,  is  set  to  work  at  its  full  capacity. 
All  the  speculative  allurements  of  a  cheap  security 
with  high  yield  of  interest  are  displayed  to  distract 
the  public  from  the  austere  path  of  sound  finance. 
When  the  day  of  reckoning  comes  there  is  an  out- 
burst of  anger  against  reckless  and  improvident 
borrowers,  who  are  alleged  to  have  taken  good 
money  without  any  intention  of  meeting  the  service 
of  the  debt.  Bondholders  then  forget  the  specu- 
lative risk  that  was  obviously  expressed  in  the  price 
at  which  the  securities  were  offered,  and  regard 
themselves  as  virtuous  investors  who  have  been 
tricked  out  of  their  money,  whereas  they  are  in  fact 
foolish  speculators  who  have  made  a  loss  which 
must  have  been  an  obvious  possibility  at  the  time 
when  they  entered  into  the  gamble. 

Much  is  heard  about  the  levity  and  improvidence 
of  economically  backward  countries,  and  their  read- 
iness to  enter  into  liabilities  which  they  cannot 
possibly  meet;  little,  if  anything,  is  said  about  the 


168        THE  BUSINESS  OF  FINANCE 

serious  responsibility  which  attaches  to  everybody 
who  lends  money  to  people  who  do  not  know  how 
to  use  it,  without  the  exercise  of  proper  care  to 
see  that  they  use  it  in  the  right  way.  A  process  of 
composition  involving  a  reduction  in  the  rate  of 
interest,  and  a  scaling  down  of  the  capital  of  the 
debt,  is  the  usual  sequel  of  these  recriminations. 
A  few  people  learn  a  lesson,  which  they  probably 
very  shortly  forget,  and  so  the  game  goes  on. 

In  the  borrowing  country  the  results  are  prob- 
ably even  more  evil.  When  a  Government  is  en- 
couraged, by  the  ease  with  which  it  can  borrow 
abroad,  continually  to  outrun  the  constable  with- 
out any  care  for  balancing  its  budget,  direct  en- 
couragement is  given  to  political  and  other  corrup- 
tion and  to  forms  of  collective  extravagance  which 
are  still  worse  in  their  economic  results.  When  the 
time  comes  when  the  borrowing  process  cannot  be 
repeated,  and  the  Government  is  no  longer  able  to 
fill  the  gap  between  its  revenue  and  expenditure 
by  raising  money  abroad,  then  the  country  finds 
itself  faced  with  the  necessity  either  for  imposing 
taxation  on  a  scale  of  great  severity,  and  shipping 
continually  to  the  borrowing  country  a  large  pro- 
portion of  its  natural  produce,  or,  as  is  more  likely, 
for  making  a  composition  with  its  creditors,  in  tlie 
course  of  which  it  repays  their  criticisms  of  its 
levity  and  improvidence  with  plentiful  charges  of 
exploitation  and  capitalistic  blood-sucking.  In  such 
a  case  as  this  both  parties  lose,  and  the  only  gain- 
ers are  the  horde  of  greedy  or  questionable  people 


INVESTMENT  ABROAD  169 

who  have  benefited  by  both  sides  of  the  bargain. 
In  the  borrowing  country  greedy  politicians  have 
probably  feathered  their  nests,  perhaps  contractors 
have  made  a  fortune  out  of  constructing  unneces- 
sary public  works  at  extravagant  prices.  In  the 
lending  country  touts  and  puffs,  during  a  brief  but 
glorious  harvest,  have  swum  in  champagne. 

The  by-products  of  bad  finance  are  an  extraor- 
dinarily disgusting  spectacle.  This  being  so,  the 
problem  that  has  to  be  solved  by  those  responsible 
for  our  financial  machinery  is  this:  How  can  they 
keep  it  clean  and  prevent  it  creating  these  evil 
products?  The  answer  is  very  difficult.  In  the 
past  the  action  taken  by  the  leaders  of  finance  in 
the  great  creditor  countries,  which  were  England 
and  France,  has  been  purely  negative.  They  re- 
fused to  handle  any  business  which  they  believed 
to  be  bad.  It  may  have  been  that  they  sometimes 
erred  on  the  side  of  taking  too  lenient  a  view,  in 
criticising  propositions  put  before  them,  from  the 
point  of  view  of  the  economic  good  of  the  borrow- 
ing country.  As  long  as  the  charge  involved  by 
the  new  debt  was  amply  covered  it  did  not  seem  to 
them  to  be  their  business  to  ask  whether  the  money 
was  going  to  be  spent  on  increasing  the  country's 
productive  power.  For  example,  if  a  South  Ameri- 
can Government  had  come  in  old  days  to  a  syn- 
dicate of  French  banks,  and  a  great  English  issuing 
house,  with  a  proposition  for  a  loan  of  a  couple  of 
millions  sterling,  or  fifty  million  francs,  and  if,  on 
the  existing  basis  of  revenue  there  was  no  question 


L70         THE  BUSINESS  OF  FINANCE 

that  the  reserve  of  this  new  debt  was  sufficiently 
well  secured  to  justify  these  institutions  in  making 
an  issue  to  the  public  that  followed  their  lead,  they 
would  probably  not  have  enquired  too  closely  con- 
cerning the  use  to  which  the  money  was  going  to  be 
put.  It  would  have  been  very  difficult  for  them 
to  do  so,  because  economically  backward  States  are 
extremely  touchy  about  their  financial  position  and 
their  financial  responsibilities.  They  naturally  and 
inevitably  resent  any  financial  tutelage,  and  they 
consider,  if  they  can  offer  a  well  secured  loan  and 
show  that  it  has  been  duly  authorised  under  the 
laws  of  the  country,  that  that  is  all  that  the  finan- 
cial house  to  which  they  entrust  the  business  has 
any  right  to  ask.  So  that  any  house  or  bank  which 
wanted  to  make  stipulations,  which  would  be  in  the 
interests  of  the  country  even  more  than  of  the 
future  bondholders,  would  run  a  serious  risk  of 
losing  the  business,  and  of  putting  it  into  the  hands 
of  less  particular  and  less  scrupulous  rivals,  so 
doing  nothing  to  prevent  it  being  carried  out,  and 
only  losing  its  profits  for  themselves  and  for  the 
centre  in  which  they  worked. 

Consequently,  in  times  when  capital  was  plen- 
tiful, competition  between  the  issuing  houses  of 
different  financial  centres  unquestionably  offered 
inducements  to  the  backward  countries  to  borrow 
more  than  they  needed,  that  is  to  say,  more  than 
was  good  for  them,  with  ultimately  the  worst  pos- 
sible results  for  all  parties  concerned.  The  profits 
of  the  issuing  house  were  handsome,  and  their  pres- 


INVESTMENT  ABROAD  171 

tige  was  enhanced  by  the  volume  of  this  kind  of 
business  that  they  did  so  long  as  it  was  technically 
good,  that  is  to  say,  so  long  as  there  was  no  default, 

It  may  possibly  be  some  years  before  this  state 
of  things  returns,  but  the  economic  resources  of 
the  world  have  been  shown  by  the  war  to  be  so  tre- 
mendous that  it  will  not  do  to  rely  with  any  cer- 
tainty on  a  famine  in  the  market  for  capital  which 
will  for  some  time  to  come  make  those  who  frequent 
it  "forswear  sack  and  live  cleanly.- •  Consequently 
it  is  not  a  day  too  soon  for  those  who  are  concerned 
to  think  this  problem  out,  and  see  their  way  through 
it.  The  real  solution,  as  for  all  these  problems 
which  we  are  considering,  is  the  terribly  slow  proc- 
ess of  the  economic  education  of  the  public.  If  the 
public  could  only  be  taught  that  loans  to  young 
countries  are  not  good,  either  for  the  borrower  or 
the  lender,  unless  there  is  a  reasonable  certainty 
that  the  expenditure  of  the  money  by  the  borrower 
is  going  to  be  made  in  such  a  way  that  it  will  in- 
crease the  country's  industry  or  commerce  to  an 
extent  sufficient  to  cover  the  service  of  the  debt,  then 
there  would  be  no  fear  that  third-rate  issuing  houses 
would  make  large  profits  by  bringing  out  ill-secured 
loans  in  the  markets  of  the  world.  Until  that  day 
comes  probably  all  that  can  be  required  of  our  lead- 
ers of  finance  is  that  they  themselves  should  set 
the  very  best  example,  refusing  to  handle  any  issue 
which  itself  comes  within  the  description  given 
above. 

There  will  for  some  time  to  come  be  great  op- 


172        THE  BUSINESS  OF  FINANCE 

portunities  for  the  placing  of  capital  abroad  under 
circumstances  which  fully  justify  it.  There  will  be 
railways  to  be  built,  country  to  be  opened  up,  ports 
and  harbours  to  be  constructed  and  deepened,  all 
kinds  of  enterprise  waiting  to  be  done,  the  caiTy- 
ing  out  of  which,  if  carried  out  cheaply  and  well, 
should  add  directly  or  indirectly  to  the  power  of 
the  borrowing  country  to  produce  and  transport 
more  goods  for  the  service  of  man.  As  loans  are 
brought  out  for  these  purposes,  it  should  be  the 
business  of  those  who  handle  them  to  see  that  these 
advantages  are  clearly  set  forth,  so  that  the  public 
may  be  taught  to  distinguish  between  issues  made 
for  these  purposes  and  others  which  are  not  adorned 
by  these  qualities.  The  process  will  necessarily 
be  slow,  and  we  need  not  expect  that  the  desire  to 
grow  rich  in  a  hurry  and  without  trouble  will  cease 
to  mislead  those  who  cherish  it  for  many  a  genera- 
tionr  But  it  is  only  along  these  lines  that  inter- 
national finance  can  be  kept  clean,  and  that  capital 
sent  from  one  country  to  another  can  be  relied  on 
not  to  fructify  in  corruption. 

So  far  I  have  been  dealing  chiefly  with  the  prob- 
lems that  arise  when  international  finance  is  con- 
cerning itself  with  loans  made  to  Governments.  Ex- 
actly the  same  principles,  of  course,  apply  when  the 
borrower  is  a  municipality  or  any  other  public  body. 
When  we  come  to  companies  formed  to  carry  out 
enterprise  abroad  the  question  is  in  some  ways  sim- 
pler, in  others  more  complicated.  It  is  simpler 
because  a  company  has  to  rely  upon  its  profit  for 


INVESTMENT  ABROAD  173 

some  enterprise  which  has  to  be  profitable  if  that 
profit  is  to  be  earned.  There  is  no  question  here^ 
of  pledging  the  taxable  capacity  of  a  country,  that 
elastic  and  elusive  quantity  which  no  one  can  test 
accurately.  A  company  is  formed  to  make  a  profit 
out  of  some  definite  operation,  whether  it  be  a  rail- 
way, or  a  land  scheme,  or  a  mine;  hence  it  follows 
that  the  economic  test  of  economic  results  ought 
in  all  cases  to  be  able  to  be  applied  with  success. 
If  any  company  comes  forward  without  being  able 
to  show  at  least  a  fair  chance  of  increasing  the  ma- 
terial output  of  the  country  in  which  it  is  going  to 
operate,  it  will  not  get  subscribers.  On  the  other 
hand  complications  arise  because  this  kind  of  con- 
cern is  usually  dealt  with,  except  perhaps  in  the 
case  of  railway  companies,  by  less  exalted  institu- 
tions than  those  which  handle  Government  loans. 
Company  securities,  as  has  already  been  observed, 
are  usually  left  rather  to  the  small  fry  of  finance, 
who  have  less  reputation  to  lose  than  the  leading 
houses,  and,  from  the  nature  of  the  case  and  the 
more  speculative  species  of  their  operations,  they 
offer  a  high  rate  of  profit,  and  so  appeal  to  a  more 
speculative  public.  There  is  in  their  case  perhaps 
a  still  greater  opportunity  for  friction  and  bitter- 
ness between  the  lender  and  the  borrower  of  the 
capital  than  in  the  case  of  Government  loans.  If, 
for  example,  the  native  landowners  find  that  they 
have  sold  their  property  to  an  alien  institution 
which  works  it  at  a  profit  highly  satisfactory  to 
itself,  they  are  apt  to  feel  that  they  have  been 


174        THE  BUSINESS  OF  FINANCE 

hardly  treated  in  the  matter  of  the  price  paid.  If, 
on  the  other,  hand,  this  price  is  such  as  does  not 
give  the  exploiting  company  a  chance  of  earning  a 
profit,  then  those  who  put  their  money  into  it  are 
likely  to  consider  that  somebody  has  swindled  them, 
and  the  foreign  seller  of  the  property  is  a  con- 
venient scapegoat. 

Difficulties  also  arise  in  the  matter  of  the  pay- 
ment of  the  native  workers  for  the  company.  If  the 
payment  of  these  workers  is  low  according  to  Euro- 
pean standards,  humanitarian  critics  will  be  ready 
to  say  that  European  investors  are  earning  big 
profits  by  sweating  ignorant  labourers  who  have  no 
idea  of  the  value  of  their  labour.  If,  on  the  other 
hand,  the  company  pays  a  higher  wage  than  is 
current  in  the  country  where  it  works,  it  will  earn 
for  itself  the  dislike  and  resentment  of  local  em- 
ployers of  labour. 

Such  are  the  difficulties  which  face  any  country 
that  embarks  in  the  difficult  business  of  financing 
alien  borrowers,  unless  it  confines  its  attentions  to 
those  whose  claims  for  the  issue  of  further  capital 
are  unquestionable.  With  the  best  will  in  the  world 
the  foreign  capitalist,  who  has  only  done  his  best 
to  stimulate  production  abroad  while  earning  a  fair 
rate  of  interest  for  himself,  is  only  too  likely  to  be 
regarded  by  those  who  have  had  the  use  of  his 
capital  as  an  alien  bloodsucker.  It  is  a  curious  fact 
that  commercial  and  industrial  transactions  seem 
to  lead  to  much  less  ill-feeling  than  financial  rela- 
tions between  any  two  parties.    If  we  buy  boots,  or 


INVESTMENT  ABROAD  175 

any  other  commodities,  or  if  we  buy  the  use  of  cer- 
tain services  that  we  need,  such  as  transport,  we 
get  the  things  we  want,  and  we  pay  what  the  seller 
asks  for  them,  sometimes  with  grumbling  and  hesita- 
tion, but  at  any  rate  we  feel  that  it  is  a  mutually 
satisfactory  transaction  or  it  would  not  have  been 
entered  into.  If  we  buy  the  use  of  somebody  else's 
money  by  promising  to  pay  interest  on  it  and  to  pay 
it  back  some  day,  it  is  almost  certain  that  a  feeling 
of  resentment  will  arise  sooner  or  later  before  the 
transaction  is  completed.  This  is  probably  so  be- 
cause we  very  soon  forget  the  advantages  that  we 
secured  when  we  got  the  money,  whereas  every 
interest  day  when  we  have  to  make  a  periodical  pay- 
ment, and  every  time  when  we  have  to  pay  back 
some  of  the  capital,  we  are  reminded  very  forcibly 
that  we  owe  something  to  somebody  and  that  we 
have  got  to  pay  it,  and  that  the  advantage  for  which 
we  are  paying  is  ancient  history  and  practically  for- 
gotten. 

Twenty  or  twenty-five  years  ago,  when  a  large 
number  of  American  farmers  were  still  indebted  to 
English  mortgage  companies,  the  unpopularity  of 
England  in  America  was  seriously  said  to  have  been 
increased  by  this  fact,  although  the  capital  acquired 
at  the  time  when  the  advances  were  made  had  been 
a  potent  factor  in  the  development  of  America's 
resources.  So  it  is  everywhere  the  lot  of  a  creditor 
country  to  be  hedged  about  by  many  disadvantages. 


CHAPTEE  IX 

FINANCE  AND  GOVERNMENT 

In  old  times  before  the  war  the  Government  as  a 
factor  in  finance  was,  in  well  developed  and  well 
managed  countries,  comparatively  unimportant.  A 
small  proportion  of  the  national  income,  that  is,  of 
the  aggregate  income  of  all  the  citizens  of  the 
country,  was  taken  by  the  Government  for  public 
purposes  by  the  process  of  taxation.  In  England, 
for  example,  where  the  aggregate  income  of  the 
citizens  was  estimated  before  the  war  at  somewhere 
between  2,000  and  2,400  millions,  the  total  expendi- 
ture of  the  State  amounted  to  less  than  200  millions, 
the  whole  of  which  was  provided  by  taxation  and 
by  profits  on  State  services  such  as  the  Post  Office, 
In  fact,  a  small  fraction  of  the  public  revenue  was 
devoted  to  the  redemption  of  the  public  debt,  the 
total  so  redeemed  in  the  last  complete  year  before 
the  war  being  about  nine  millions. 

In  the  light  of  what  has  happened  during  the  war 
and  what  is  likely,  if  not  certain,  to  happen  after 
the  war,  the  calls  of  the  public  purse  upon  the  joint 
purse  of  the  individuals  composing  the  nation  were 
thus  a  very  small  matter.    Nevertheless,  even  in 

176 


FINANCE  AND  GOVERNMENT         177 

those  days,  there  was  plenty  of  controversy  concern- 
ing the  best  method  by  which  revenue  could  be 
raised,  and  the  balancing  of  the  annual  budget  was 
a  matter  that  always  provoked  a  good  deal  of  dis- 
cussion and  sometimes  a  certain  amount  of  dif- 
ficulty. 

In  this  connection  the  duty  of  the  Government  is 
confined  to  raising  all  that  is  required  for  public 
purposes  by  taxation,  or  by  loans,  if  loans  are  justi- 
fied or  inevitable;  finance,  or  at  least  the  financial 
machinery,  as  carried  on  by  individual  enterprise 
apart  from  the  Government,  has  little  or  nothing  to 
say  to  the  matter.  Since,  however,  it  is  clear  that 
in  the  future  very  much  larger  revenues  will  have 
to  be  raised  in  order  to  meet  the  huge  charges  that 
will  be  imposed  upon  the  nations  of  the  world  by 
war  debts,  to  say  nothing  of  heavier  expenditure 
upon  all  kinds  of  schemes  by  which  the  economic 
position  of  the  nations  may  or  may  not  be  bene- 
fited, it  is  clear  that  all  the  controversies  that  used 
to  rage  concerning  questions  of  taxation  will  be 
greatly  increased  and  embittered,  and  it  is  much 
to  be  desired  that  those  who  handle  the  machinery 
of  finance  should  obtain  clear  views  concerning 
what  is  and  is  not  good  policy  on  this  subject. 
Hitherto  they  have  been  inclined  to  leave  the  matter 
to  the  officials  concerned  and  have  given  little  at- 
tention to  the  study  of  the  very  important  ques- 
tions involved.  A  sound  public  opinion  on  the  sub- 
ject of  taxation  and  public  loans  is  probably  one  of 
the  most  profitable  assets  that  a  nation  can  possess, 


178         THE  BUSINESS  OF  FINANCE 

and,  since  financiers  ought  from  their  position  and 
experience  to  be  more  capable  than  most  other  mem- 
bers of  the  community  of  arriving  at  sound  con- 
clusions on  problems  that  are  based  on  figures,  it 
is  high  time  for  them  to  purge  their  minds  of  all 
prejudice  and  think  these  questions  out,  so  that, 
when  controversy  arises,  they  may  have  some  prac- 
tical contributions  to  make  to  the  stock  of  national 
wisdom. 

There  is  no  need  now  to  enter  into  a  historical 
disquisition  on  the  growth  of  public  sentiment  con- 
cerning the  right  kind  of  taxation.  It  is  universally 
admitted  that  the  test  of  all  taxation,  the  one  which 
was  embodied  in  Adam  Smith's  famous  maxim  on 
the  subject,  is  that  it  should  be  applied  in  propor- 
tion to  the  ability  of  the  taxpayer  to  meet  it.  In 
considering  his  question  there  is  no  need  and  no 
benefit  in  being  sentimental  and  wandering  into 
ethical  doctrine.  What  we  have  to  consider  is,  what 
kind  of  taxation  will  pay  a  nation  best  from  the 
point  of  view  of  its  interest  of  the  whole. 

It  is  at  once  abundantly  clear  that  to  impose  any 
taxation  upon  those  who  are  struggling  on  the 
margin  of  subsistence  is  bad  policy,  quite  apart 
from  any  humanitarian  views,  from  the  point  of 
view  of  the  pockets  of  the  other  members  of  the 
community  and  of  the  nation  as  a  whole.  Those  who 
have  not  enough  to  keep  themselves  strong  and 
efficient  will  only,  if  money  is  taken  out  of  their 
pockets  by  taxation,  be  reduced  to  a  still  lower  level 
of  incompetence  and  bad  health,  and  so  become 


FINANCE  AND  GOVERNMENT         179 

sooner  or  later  a  charge  either  upon  the  charity  of 
their  fellow  citizens  or  upon  public  institutions 
which  have  to  provide  for  the  destitute.  From  the 
most  entirely  utilitarian  and  practical  point  of 
view,  taxation  that  increases  the  misery  of  the 
miserable  is  bad  for  their  more  prosperous  neigh- 
bours. If  once  this  is  granted,  and  anyone  who  is 
not  blinded  by  habit  and  prejudice  must  surely 
grant  so  obvious  a  platitude,  it  is  seen  that  all  in- 
direct taxation  upon  the  necessaries  of  life  is  ruled 
out  as  being  bad  business  from  the  point  of  view 
of  the  State. 

For  example,  a  tax  on  bread  is  clearly  the  worst 
kind  of  finance  in  any  community  in  which  there  is 
any  considerable  number  of  people  who  are  not 
already  properly  provided  with  food  and  light  and 
clothes  and  housing  accommodation.  Thus  it  hap- 
pens that,  in  communities  that  have  arrived  at  any- 
thing like  a  reasonable  state  of  economic  develop- 
ment, it  is  not  usual  now  to  find  taxes  upon  food 
imposed.  It  is  done  sometimes,  as  in  Germany  for 
example,  where  it  was  considered  that  public  policy 
made  it  necessary  that  the  landed  interest  should  be 
maintained  in  a  sufficient  state  of  prosperity  with 
a  view  to  the  political  stability  of  the  country,  and 
that  a  number  of  people  working  on  the  land  should 
still  be  kept  in  the  position  of  comparative  back- 
wardness implied  by  that  occupation,  so  that  the 
supply  of  physically  developed  but  mentally  docile 
recruits  for  the  army  might  be  maintained  at  the 
required  level. 


180         THE  BUSINESS  OF  FINANCE 

Apart  from  political  or  military  considerations 
of  this  kind,  it  will  not  often  be  found  that  modern 
States  permit  revenue  to  be  raised  to  any  great 
extent  from  the  food  of  the  people.  Even  when  we 
move  on  from  the  actual  necessaries  of  life,  such  as 
bread,  to  articles  of  common  consumption,  such  as 
tea  or  tobacco,  it  is  seen  at  once  that  taxation  im- 
posed upon  them  has  the  grave  disadvantage  of 
implying  what  economists  call  "inverse  gradua- 
tion," that  is  to  say,  it  presses  with  a  growing 
weight  of  severity  upon  those  who  are  least  able  to 
bear  the  weight  of  taxation.  The  taxation  implied 
by  the  purchase  of  an  ounce  of  tobacco  is  the  same 
whether  the  buyer  be  a  crossing  sweeper  or  a  million- 
aire. The  proportion  of  income  spent  upon  tobacco 
by  the  crossing  sweeper  is  very  much  higher  than  in 
the  case  of  the  millionaire,  and  the  total  income 
out  of  which  it  is  paid  is  very  much  lower.  Con- 
sequently taxes  such  as  these,  though  they  find 
their  place  in  the  fiscal  policies  of  most  countries, 
do  not  commend  themselves  on  purely  economic 
grounds. 

The  idea  that  lies  behind  them  is  that  taxation  is 
most  easily  collected  when  the  man  who  pays  it  is 
not  aware  or  habitually  forgets  that  he  has  paid  it. 
Anyone  who  buys  tobacco  or  sugar  is  supposed  to 
be  deluded  into  the  belief  that  all  the  money  paid 
for  these  commodities  is  actually  spent  upon  them — 
he  does  not  recognise  that  part  of  it  is  actually 
spent  upon  the  government  of  the  country,  and  so 
he  contributes  readily  to  the  government  of  the 


FINANCE  AND  GOVERNMENT         181 

country  because  he  does  not  know  that  he  is  doing 
so. 

This  sort  of  principle  in  taxation  may  have 
worked  well  in  times  when  statesmen  were  some- 
what unscrupulous  in  the  matter  of  imposing  a  bur- 
den as  long  as  those  upon  whom  it  was  placed  were 
too  ignorant  to  recognise  it,  and  too  ill  organised  to 
protest  against  it.  Nevertheless,  the  tendency  has 
lately  been  for  a  decrease  in  the  proportion  raised 
by  indirect  taxation  and  an  increase  in  the  pro- 
portion raised  by  direct  and  conscious  payments  on 
the  part  of  the  citizen,  who  knows  perfectly  well 
what  he  is  paying  and  pays  with  as  much  cheerful- 
ness as  he  can  master.  The  greater  honesty  of  this 
process  is  a  strong  recommendation  in  its  favour, 
and  it  is  fairly  clear  that,  as  the  economic  educa- 
tion of  the  leading  nations  progresses  (if  indeed  it 
can  yet  be  said  to  have  begun),  this  tendency  to 
direct  and  conscious  taxation  will  continue  at  an 
accelerated  pace  until  it  is  possible  that  in  the  ful- 
ness of  time  it  will  drive  all  others  out  of  the  field. 
Nevertheless  there  is  still  a  very  strong  prejudice 
against  direct  taxation,  especially  on  the  part  of 
those  who,  owing  to  its  limited  application,  have  to 
submit  to  indirect  taxation  with  all  the  inequities 
of  inverse  graduation  already  described. 

It  has  been  said  by  Sir  Robert  Giffen  that  direct 
taxation  produces  three  times  as  much  misery  as 
indirect.  If  this  is  so,  it  only  shows  how  much 
has  to  be  done  to  bring  home  to  the  citizen  what 
taxation  means  and  the  best  way  of  collecting  it  and 


182        THE  BUSINESS  OF  FINANCE 

of  paying  it.  As  long  as  taxation  is  resented  as  a 
more  or  less  unfair  imposition  by  which  a  quite  un- 
sympathetic Government  takes  a  certain  amount  of 
money  out  of  our  pockets  and  uses  it  for  purposes 
of  which  we  may  or  may  not  approve,  it  may  be  true 
that  the  best  way  to  get  money  out  of  people  is  to 
take  it  from  them  in  ways  which  leave  them  un- 
conscious that  they  are  being  relieved  of  it.  If  and 
when  a  community  can  be  discovered  in  which  taxa- 
tion is  recognised  as  the  means  by  which  a  Govern- 
ment, chosen  by  the  voice  of  the  people,  acting  in 
accordance  with  the  will  of  the  people,  takes  money 
from  them  to  be  spent  for  the  good  of  the  people, 
then  it  will  perhaps  be  recognised  that  money  so 
taken  by  the  Goverment  should  and  will  be  con- 
tributed cheerfully  by  the  citizen  and  that  he  will 
not  want  to  be  bamboozled  into  paying  it  in  the 
belief  that  he  is  buying  groceries  or  tobacco,  but 
that  he  will  prefer  to  know  exactly  what  he  is  pay- 
ing and  exactly  how  it  is  going  to  be  spent. 

This  can  only  be  done  by  the  development  of  the 
raising  of  revenue  by  what  are  called  direct  taxes, 
that  is  to  say,  by  income  tax  in  its  various  forms  and 
by  death  duties  and  legacy  duties.  The  advantages 
of  these  taxes  lie  not  only  in  their  being  clearly 
recognised  when  paid,  but  that  in  their  case  only  is 
it  possible  to  apply  the  great  principle  of  gradua- 
tion and  differentiation  which  makes  people  pay 
more  or  less  according  to  the  amount  of  their  in- 
come and  the  source  from  which  it  is  obtained. 

Taxation  in  proportion  to  ability  to  pay  clearly 


FINANCE  AND  GOVERNMENT         183 

implies  that  those  who  have  larger  incomes  should 
pay  a  higher  proportion  of  it  in  taxation.  If  we 
take  three  incomes  of  £100,  £1,000  and  £10,000  a 
year,  and  take  10  per  cent,  from  each,  it  is  obvious 
that  the  sacrifice  implied  is  not  the  same.  The  man 
with  £100  a  year  pays  £10,  and,  with  prices  at  any- 
thing like  their  present  level,  his  health  and  effici- 
ency and  those  of  his  family  would  certainly  be  im- 
paired because  they  would  have  to  reduce  their 
purchases  of  the  necessaries  of  life.  The  man  with 
£1,000  a  year,  who  paid  £100,  would  not  suffer  any 
encroachment  upon  his  supply  of  necessities,  but 
would  have  to  curtail  his  supply  of  comforts  to  a 
very  much  greater  extent  than  his  richer  neighbour 
with  £10,000  a  year  who,  having  paid  his  £1,000, 
would  still  have  £9,000  with  which  to  control  for  his 
own  use  the  goods  and  services  produced  by  the  com- 
munity. 

There  is  another  still  more  practical  argument 
in  favour  of  graduation,  which  is  that  he  who  has 
more  depends  more  upon  the  protection  of  the 
State  than  he  who  draws  a  small  income.  The  en- 
joyment of  a  large  income  implies  so  much  in  the 
way  of  ordered  civilisation  and  the  protection  im- 
plied by  that  stable  organisation,  that  we  see  at 
once  that  those  in  enjoyment  of  large  incomes,  if 
that  stable  organisation  did  not  provide  them  with 
the  necessary  security,  would  have  to  pay  away  a 
large  proportion  of  it  in  keeping  a  private  army  to 
defend  it ;  whereas  those  with  small  incomes,  having 
little  or  nothing  that  is  worth  stealing,  are  not 


184         THE  BUSINESS  OF  FINANCE 

nearly  so  liable  to  attempts  by  freebooters  to  rear- 
range the  wealth  of  the  world  in  their  own  interests. 
And  it  is  not  only  in  the  enjoyment  of  his  income 
that  the  man  with  the  large  one  owes  more  to  the 
State  and  its  protection.    He  could  not  even  earn 
it  if  it  were  not  for  the  orderly  state  of  society  which 
enables  him  to  exercise  his  talents.     It  is  possible 
that  in  the  Middle  Ages  robber  barons  and  cattle 
lifters  and  others,  who  took  advantage  of  the  op- 
portunities  afforded  by  a  primitive  community, 
may  have  lived  upon  the  rest  of  society  with  a  cer- 
tain amount  of  satisfaction  to  themselves  and  in 
the  enjoyment  of  the  very  moderate  comforts  that 
were  then  available.     But  they  could  not  have  in- 
dulged themselves  with  anything  like  the  ease  and 
comfort  that  are  now  available  to  those  who  enjoy 
large  incomes.    And  they  could  not  have  imitated 
modern  successful  business  men  in  anything  like 
the  extent  of  the  wealth  that  they  were  able  to  earn 
by  their  more  questionable  system.    Successful  busi- 
ness men  very  naturally  believe  that  they  owe  all 
that  society  gives  them  to  the  exercise  of  their  tal- 
ents.    They  do  not  often  reflect  that  they  could 
neither  have  acquired  nor  exercised  these  talents  on 
a  desert  island,  or  even  in  an  economically  unorgan- 
ised State.    The  enterprise  of  a  modern  captain  of 
industry  depends  so  much  upon  the  existence  of  an 
army  of  producers,  an  army  of  transporters  and  an 
army  of  consumers,  and  so  much  on  an  ordered 
State  which  provides  the  necessary  police,  so  that 
all  these  armies  can  carry  out  their  operations  un- 


FINANCE  AND  GOVERNMENT         185 

disturbed  by  anarchy  and  confusion,  that  the  debt 
of  successful  earners  to  the  State  is  one  which 
fully  justifies  the  principle  of  graduation  in  the 
raising  of  the  State's  revenue — that  is,  the  principle 
that  from  those  who  have  most  shall  most  be  taken 
away. 

When  we  come  to  differentiation,  we  see  again, 
if  we  remove  all  prejudice  from  our  minds,  that  this 
principle  also  is  based  upon  a  thoroughly  equitable 
foundation.  Those  who  enjoy  an  income  which 
they  get  from  inherited  wealth,  or  wealth  which 
they  have  received  by  gift,  do  so  without  any  ex- 
ertion on  their  own  part  and  without  any  of  the 
anxiety  which  must  haunt  the  salary  earner,  espe- 
cially if  he  has  dependents,  who  may  be  earning  as 
much  or  a  still  greater  income.  A  man  who  is  earn- 
ing £1,000  a  year  in  return  for  hard  work  done  and 
liable  to  be  stopped  at  any  moment  if,  owing  to  ill 
health  or  any  other  accident,  he  were  deprived  of 
his  position,  is  earning  an  income,  which  is  a  very 
different  matter  from  his  neighbour  who  is  receiv- 
ing £1,000  a  year  from  investments  in  gilt  edged 
securities,  the  whole  of  which  has  been  left  to  him 
by  a  father  or  an  uncle  or  a  friend. 

Ability  to  pay  in  these  two  cases  is  obviously  not 
the  same.  The  earner  is  not  able  to  pay  so  much 
because  he  is  bound,  if  he  is  not  going  to  become  a 
charge  on  the  State,  to  set  aside  every  year  a  certain 
amount  as  a  provision  against  ill  health  or  old  age. 
From  the  other  man  the  limit  of  the  amount  that 


186        THE  BUSINESS  OF  FINANCE 

can  be  taken  would  at  first  sight  appear  to  be  all 
that  can  maintain  him  in  sufficient  health  and  effi- 
ciency to  lead  a  life  of  idleness.  In  fact,  it  may  be 
contended  that,  from  the  point  of  view  of  the  bene- 
fit to  the  owner  of  the  income,  the  kindest  thing  to 
do  would  be  to  take  it  all  away  from  him  as  long 
as  it  was  done  early  enough  in  his  career  for  him 
to  learn  how  to  make  a  living  for  himself.  The  ex- 
istence of  an  idle  rich  class  is  not  good  for  the  com- 
munity and  is  not  good  for  the  members  of  the 
class,  if  they  make  bad  use  of  their  opportunities. 
Fortunately,  human  nature  being  on  the  whole  rea- 
sonable and  well-meaning,  it  is  out  of  the  idle  rich 
class  that  a  great  deal  of  quiet  public-spirited  work 
is  done  which  might  otherwise  not  be  done  at  all. 
Nevertheless,  the  strain  on  the  ordinary  person  who 
finds  himself  cursed  with  a  competence,  as  the 
phrase  says,  is  so  great  that  it  requires  unusual 
strength  to  go  through  life  without  becoming  a 
nuisance  to  himself  and  his  neighbours. 

Recognition  of  this  fact  has  become  very  much 
more  general  since  the  war  has  set  most  people 
busy  in  most  countries  of  the  world,  and  it  seems 
probable  that  taxation  of  estates  passing  by  death, 
or  of  incomes  acquired  by  inheritance,  is  the  means 
by  which  economic  progress  in  the  direction  of  the 
better  distribution  of  wealth  will  advance  most  rap- 
idly in  future.  It  is  quite  a  common  thing  now  to 
hear  rich  people  admitting  that  it  is  not  good  for 
anybody  to  be  born  too  rich.  Hitherto  estate  duties 


FINANCE  AND  GOVERNMENT         18T 

and  differentiated  income  tax  liave  been  objected 
to,  and  with  some  reason,  on  the  ground  that,  if 
they  are  screwed  up  too  high  they  will  tend  to  limit 
the  process  of  accumulation  on  which  economic 
progress  depends.  Why,  it  is  asked,  should  any- 
body work  to  make  a  big  fortune,  if  the  State  is 
going  to  take  a  large  slice  of  it  when  he  dies  and 
then  impose  a  highly  differentiated  income  tax  on 
the  heirs  whom  he  leaves  to  enjoy  it? 

This  question  was  difficult  to  answer  as  long  as 
many  of  the  people  who  were  likely  to  be  accumulat- 
ing fortunes  felt  like  that.  Taxation  problems,  like 
most  economic  problems,  are  largely  psychological. 
If  enough  people  who  were  likely  to  be  accumulat- 
ing wealth  thought  it  unfair  that  their  accumula- 
tion should  be  taxed  at  and  after  their  death,  such 
a  system  would  certainly  act  as  a  bar  to  accumula- 
tion, and  accumulation  is,  after  all,  the  process  by 
which  people,  instead  of  spending  their  money  on 
themselves,  put  it  at  the  disposal  of  industry  to 
increase  mankind's  production.  It  is  not  a  good 
thing  to  check  accumulation,  but,  if  once  it  is  recog- 
nised that  those  who  accumulate  fortunes  should 
and  can  and  will  do  so  on  the  same  principle  that 
other  people  collect  stamps  or  blue  china,  and  will 
be  sufficiently  satisfied  by  the  knowledge  that  they 
are  going  to  leave  behind  them  a  million  or  two  at 
their  demise— If  they  can  be  cured  of  the  idea  that 
they  will  have  no  satisfaction  in  doing  so  unless 
those  wEo  come  after  them  are  to  be  demoralised 
by  the  use  of  millions— then  it  is  quite  possible  that 


188         THE  BUSINESS  OF  FINANCE 

the  principle  of  differentiation  and  a  much  more 
vigorous  use  of  estate  duties  may  be  employed  with- 
out doing  any  economic  harm. 

In  the  mean  time,  however,  it  is  desirable  that 
all  who  are  interested  in  good  financial  arrange- 
ments should  think  out  some  means  by  which  a 
serious  blot  on  the  Income  Tax  can  be  removed, 
that  is  to  say,  its  application  to  the  whole  amount 
that  a  man  earns  or  receives,  irrespective  of  the 
use  that  he  makes  of  the  money.  Whether  he  spends 
all  the  money  on  himself,  or  whether  he  puts  some 
aside,  the  Income  Tax  levied  is  the  same. 

As  has  frequently  been  pointed  out  in  the  pre- 
ceding pages,  the  act  of  saving,  keen  as  the  motive 
to  it  often  is,  is  the  only  method  by  which  capital 
can  be  provided  for  industry,  and  so  the  economic 
progress  of  the  world  can  be  furthered  and  expand- 
ed. On  economic  grounds  there  is  every  reason  for 
doing  everything  to  encourage  the  saver,  and  to 
penalize  those  who  spend  money  especially  on  un- 
social objects.  This  ideal  of  Income  Tax  levied  on 
money  spent,  rather  than  on  the  total  income  re- 
ceived, has  high  theoretical  authority,  having  been 
fathered  by  John  Stuart  Mill,  approved  by  Profes- 
sor Pigou,  and  now  endorsed  by  the  veteran  Pro- 
fessor Marshall  in  his  interesting  contribution  on 
National  Finance  and  Taxation  to  a  book,  entitled 
"After  War  Problems."*    On  page  321  of  this  work 


*  London  :   George  Allen  &  Unwin,  Ltd. 


FINANCE  AND  GOVERNMENT         189 

Professor  Marshall  remarks  as  follows : — 

**If  it  were  possible  to  exempt  from  tlie  income- 
tax  that  part  of  income  which  is  saved,  to  become 
the  source  of  future  capital,  while  leaving  property 
to  be  taxed  on  inheritance  and  in  some  omer  ways ; 
then  an  income-tax  graduated  with  preference  to  its 
amount,  and  the  number  of  people  who  depended 
for  their  support  on  each  income,  would  achieve  the 
apparently  impossible  result  of  being  a  graduated 
tax  on  all  personal  expenditure.  Rich  and  poor 
alike  would  be  left  to  select  those  uses  of  their  in- 
comes which  suited  them  best,  without  interference 
from  the  State,  except  in  so  far  as  any  particular 
form  of  expenditure  might  be  thought  specially 
beneficial,  or  specially  detrimental,  to  public  inter- 
ests. The  income-tax  would  then  levy  the  same 
percentage  on  the  rich  man's  expenditure  on  coarse 
tea  and  on  fine  tea,  on  bread  and  on  expensive  food ; 
and  a  higher  percentage  on  each  than  on  the  poor 
man's  expenditure  on  anything,  unless  it  be  alcohol 
and  tobacco.  The  way  to  this  ideal  perfection  is 
difficult ;  but  it  is  more  clearly  marked  than  in  re- 
gard to  most  Utopian  goals." 

Technical  difficulties  bristle  in  the  way  of  such 
a  scheme,  but  technical  difficulties  have  always 
bristled  whenever  and  wherever  any  reform  of  tax- 
ation is  mooted.  The  graduation  of  Income  Tax  was 
long  declared  to  be  impossible  and  is  now  a  com- 
monplace of  fiscal  practice.  In  the  meantime, 
pending  the  surmounting  of  these  obstacles,  it  might 
be  possible  to  achieve  something  in  the  same  direc- 
tion by  a  consumption  tax  imposed  by  means  of  a 
graduated  receipt  stamp  on  all  purchases  greater 


190         THE  BUSINESS  OF  FINANCE 

in  value  than,  say,  £1.  By  this  method  there  would 
be  no  taxation  of  the  cheapest  kinds  of  necessities 
which  the  poorest  of  the  population  have  to  buy, 
and  when,  for  example,  patriotic  citizens  try  to 
evade  taxation  by  making  purchases  of  articles 
such  as  diamond  necklaces  on  the  ground  that  they 
yield  no  income  and  consequently  escape  Income 
Tax,  they  would  pay  something  to  the  Exchequer 
at  the  time  of  purchase.  It  is  obvious,  however, 
that  an  impost  of  this  kind  would  be  easily  evaded 
unless  the  public  and  tradesmen  with  whom  it 
deals  were  convinced  of  its  equity,  and  also  that  it 
suffers  by  comparison  with  an  equitably  imposed 
Income  Tax,  because  it  can  only  be  graduated  ac- 
cording to  the  amount  of  the  purchase,  and  not  ac- 
cording to  the  circumstances  of  the  purchaser. 

In  all  these  problems  of  taxation  a  Government 
cannot  go  far  ahead  of  the  intelligence  and  good- 
will of  the  community  it  is  taxing;  in  fact,  more 
usually  it  lags  behind  them  and  has  to  be  pushed 
along  by  public  opinion  in  the  direction  of  fiscal 
reform.  There  are  limits  to  the  extent  to  which 
money  can  be  extorted  from  the  citizens,  even  the 
richest  of  them,  against  their  will.  In  war  time, 
when  public  opinion  is  acutely  critical  of  the  action 
of  the  rich,  and  the  Government  has  means,  by  ex- 
amining people's  foreign  correspondence  and  so 
on,  of  seeing  what  people  are  doing  to  a  much 
greater  extent  than  in  peace,  it  is  able  to  impose  its 
will  in  fiscal  matters  much  more  easily.  But  in 
ordinary  times  the  idea  that  the  rich  can  be  taxed 


FINANCE  AND  GOVERNMENT         191 

to  any  extent  that  idealist  reformers  think  fit,  with- 
out regard  to  the  feelings  of  the  rich,  is  to  a  great 
extent  a  mistake;  even  if  it  were  possible  there 
would  come  a  point  at  which  it  would  not  pay 
to  grow  rich,  and  the  accumulation  of  riches, 
badly  as  they  are  often  used,  is  in  fact  the  process 
by  which  economic  progress  is  at  present  furthered, 
and  can  only  be  furthered  until  some  better  system 
is  found.  Consequently,  it  is  very  necessary  that 
those  who  handle  or  own  great  wealth  should  give 
serious  attention  to  these  fiscal  problems,  recog- 
nising the  claim  of  their  poorer  brethren,  that  if  it 
were  not  for  the  great  mass  of  humanity  who  do 
the  rough  work  of  the  world,  the  accumulation  and 
enjoyment  of  wealth  by  the  rich  would  be  impos- 
sible. 

It  is  probable  that  in  the  next  few  generations 
very  great  changes  will  be  seen  in  fiscal  methods, 
and  unless  these  changes  are  to  be  hammered  out 
in  an  uncomfortable  and  embittered  atmosphere  it 
is  high  time  that  all  classes  of  the  community  learn 
to  take  a  reasonable  view  of  the  demands  of  gov- 
ernment upon  private  purses  and  try  to  turn  these 
demands  into  the  only  direction  that  justifies  gov- 
ernment in  making  them,  that  is  to  say,  the  eco- 
nomic betterment  of  the  nation  as  a  whole,  through 
an  improved  production  and  a  more  equitable  dis- 
tribution of  product. 

Apart  from  taxation  the  means  by  which  the  Gov- 
ernment provides  itself  with  money  for  its  needs 
bring  it  directly  into  contact  with  the  machinery 


192        THE  BUSINESS  OF  FINANCE 

of  finance,  because  the  only  methods  by  which  it  can 
do  so  are  by  borrowing  or  by  inflating  the  cur- 
rency. And  since  the  process  of  inflation  is  usually 
done  through  the  machinery  of  finance,  and  bor- 
rowing on  any  scale  has  to  be  so  carried  out,  finance 
is  very  much  in  the  picture  when  the  Government 
has  resort  to  these  methods;  very  often,  in  fact,  the 
two  methods  go  together.    It  might  be  said  briefly 
that  whenever  the  Government  borrows  directly 
from  bankers,  or  indirectly  from  bankers  by  bor- 
rowing from  those  who  borrow  from  their  banks  in 
order  to  find  the  money,  there  is  an  increase  of 
currency  which  will  not  be  accompanied  by  an  in- 
crease in  production,  and  will  therefore  involve  in- 
flation.   For  example,  if,  as  happened  in  England, 
the  Government,  in  times  when  revenue  is  coming 
in  slowly,  raises  money  by  selling  Treasury  Bills 
to  the  Bank  of  England  or  to  other  banks,  or  by 
getting   big   credits   from   the   Bank  of   England 
against  Ways  and  Means  advances,  the  effect  of 
this  is  that  nobody  hands  over  buying  power  to  the 
Government  which  he  would  otherwise  have  spent 
for  himself,  as  happens  when  taxes  are  collected, 
but  that  the  banking  creates  new  money  for  the 
Government  by  giving  it  credits  in  its  books  against 
which  it  can  draw  cheques,  which,  as  it  pays  them 
out  to  contractors  and  others,  are  paid  back  again 
into  the  aggregate  of  banking  deposits,  which  are 
swelled  by  this  process  to  the  extent  of  the  Govern- 
ment borrowing. 

By  this  method,  if  we  take  a  concrete  example, 


FINANCE  AND  GOVERNMENT         193 

the  Government  places  an  issue  of  a  million  Treas- 
ury Bills  with  an  English  bank ;  the  English  bank's 
Balance  Sheet  is  thus,  for  the  time  being,  altered  by 
its  holding  a  million  Treasury  Bills  instead  of  a 
million  of  cash  at  the  Bank  of  England  which  it 
has  handed  over  to  the  Government  in  payment 
of  the  Bills.  The  Government  pays  the  million  to 
half  a  dozen  firms  of  contractors,  who  proceed  to 
pay  them  into  their  accounts  at  the  bank  which 
lent  the  money,  which  consequently  gets  its  money 
back  with  an  increase  of  a  million  in  its  deposits. 
Its  total  of  cash  is  just  the  same  as  it  was  before 
the  transaction  began,  but  it  has  added  a  million 
Treasury  Bills  to  its  assets,  and  a  million  deposits 
to  its  liabilities.  It  would  not  of  course  often  hap- 
pen that  the  contractors  whom  the  Government 
paid  with  the  million  lent  by  this  particular  bank 
would  all  be  its  own  customers,  but  if  we  could 
imagine  that  all  banks  in  England  were  one,  then 
it  would  be  obvious  that  one  bank  would  increase 
its  deposits  as  fast  as  it  increased  its  advances. 
And  this  does  in  fact  happen  if  we  take  the  banking 
figures  as  a  whole,  and  consequently  one  of  the  fea- 
tures of  British  war  finances  has  been  a  great  in- 
crease in  banking  deposits,  due  to  the  use  that  the 
Government  has  made  of  the  banking  machinery 
in  providing  it  with  currency  for  war  purposes 
which  it  had  not  the  courage  to  take  in  taxation,  or 
the  energy  and  ability  to  charm  out  of  the  pockets 
of  the  people  by  successful  appeals  to  them  to  lend 
their  money. 


194        THE  BUSINESS  OF  FINANCE 

The  British  Government  has  also,  for  the  first 
time  in  its  history,  made  free  use  of  the  printing 
press  on  its  own  account  by  the  issue  of  a  new  kind 
of  currency  called  Treasury  Notes  for  £1  and  10/-. 
These  notes  were  first  issued  at  the  time  of  the 
crisis  in  August,  1914,  when  the  public  and  some  of 
the  banks  were  hoarding  gold,  and  the  only  form 
of  legal  tender  paper  was  the  Bank  of  England 
note,  which  was  not  issued  in  denominations  of  less 
than  £5.  We  do  not  yet  know  why  the  Government 
undertook  this  business  of  new  issue  instead  of 
leaving  it  in  the  hands  of  the  Bank  of  England, 
which  could  have  handled  it  with  perfect  ease  and 
elasticity,  seeing  that  the  Currency  Act  of  lf)14 
suspended  all  restrictions  on  its  power  to  issue 
notes.  In  their  original  form  the  Treasury  Notes 
were  evidently  meant  only  to  be  issued  as  an  ad- 
vance to  banks.  This  is  shown  by  Section  2  of  the 
Act,  which  says  that  "The  amount  of  any  Notes 
issued  to  any  person  shall  *  *  *  be  a  floating 
charge  in  priority  to  all  other  charges  *  *  *  on 
the  assets  of  that  person." 

It  is  clear  that  notes  which  are  to  be  a  first 
charge  on  all  the  assets  of  the  holder  were  only 
meant  to  be  outstanding  as  long  as  the  holder  held 
them  as  an  advance.  But  the  Act,  which  was  very 
hastily  drafted  and  passed,  did  not  provide  that 
the  borrower  of  the  notes  could  only  repay  the 
advance  in  the  same  form  in  which  he  had  bor- 
rowed, namely,  by  handing  back  the  notes;  and  so 
the  banks,  naturally  unwilling  to  pay  the  Govern- 


FINANCE  AND  GOVERNMENT         195 

ment  interest  at  current  Bank  rate  on  these  ad- 
vances which  took  the  form  of  notes,  paid  the  Gov- 
ernment off  by  draft  on  their  balances  at  the  Bank 
of  England,  and  kept  the  notes  still  outstanding, 
and  for  a  long  time  past  it  has  been  the  custom 
for  any  English  bank  that  wanted  notes  to  get 
possession  of  them  by  paying  for  them  with  the  draft 
on  its  balance  at  the  Bank  of  England  instead  of 
going  through  the  ceremony  of  a  loan.  Conse- 
quently there  has  been  no  limit  to  the  extent  to 
which  these  could  be  created,  except  the  possession 
of  a  sufficient  balance  at  the  Bank  of  England  on 
the  part  of  any  bank  which  wanted  to  increase  its 
supply.  And  as  balances  at  the  Bank  of  England 
have  been  continually  fed  by  the  Government's 
policy  in  borrowing  from  the  bank  on  Ways  and 
Means  advances  and  otherwise,  and  as  these  ad- 
vances have  been  continually  transferred  from  the 
Government's  credit  to  that  of  other  banks  through 
the  process  described  above,  there  has  never  been 
any  lack  of  a  balance  at  the  Bank  of  England  which 
could  be  turned  into  Treasury  Notes,  and  so  the 
supply  of  legal  tender  currency  has  continually 
grown. 

These  increases  in  legal  tender  currency,  and 
in  the  right  to  draw  cheques  which  is  inherent  in 
the  increase  of  banking  deposits,  have  unquestion- 
ably been  an  important  cause  of  the  rise  in  prices, 
which  has  done  so  much  to  increase  the  cost  of 
the  war  in  England  and  to  embitter  feeling  be- 
tween classes,  owing  to  suspicions  of  exploitation 


196         THE  BUSINESS  OF  FINANCE 

and  profiteering  on  the  part  of  those  who  believe 
that  prices  were  being  forced  up  by  unsavoury 
machinations,  when  in  fact  they  were  being  hoisted 
by  the  stupidity  and  timidity  of  politicians  and 
officials. 

The  scale  on  which  these  things  are  done  in  war 
time  enables  us  to  see  with  special  clearness  the 
evil  effects  that  they  carry  with  them.  Borrowing 
from  bankers  on  Treasury  Bills,  or  Certificates  of 
Indebtedness,  or  whatever  the  process  may  be 
called,  is  a  system  which  is  only  justified  as  a 
temporary  measure  to  tide  over  a  period  in  which 
the  Government's  revenue  is  coming  in  sluggishly. 
As  soon  as  it  is  applied  as  a  permanent  part  of 
Government  finance  it  means  inflation  on  a  larger 
or  smaller  scale,  and  should  be  resisted  as  far  as 
possible  by  those  responsible  for  the  financial  ma- 
chinery whose  business  it  is,  with  their  experience 
and  practical  knowledge,  to  correct  the  vagaries 
of  official  bunglers  in  the  money  market.  It  is 
commonly  said  that  in  time  of  war  or  great  emer- 
gency a  certain  amount  of  inflation  is  inevitable 
because  otherwise  the  Government  cannot  get  the 
money  that  it  wants.  This  argument  overlooks  the 
fact  that  getting  the  money  is  only  part  of  the  Gov- 
ernment's problem.  What  it  has  to  do  when  it  is 
at  war,  or  when  any  other  causes  make  it  necessary 
to  take  to  itself  a  large  proportion  of  the  national 
production,  is  to  get  the  goods.  Manufacturing 
more  money,  with  the  help  of  the  banks  or  without, 
if  it  does  not  increase  the  amount  of  goods  available 


FINANCE  AND  GOVEENMENT         197 

merely  gives  the  Government  a  short  cut  for  grab- 
bing goods  on  false  pretences  by  screwing  up  the 
prices  of  all  the  goods  available,  and  so  making 
the  community  go  short  by  reducing  the  buying 
power  of  the  money  that  is  left  in  its  pocket.  It 
is  a  cowardly  and  devious  way  of  doing  the  trick, 
but  as  long  as  the  economic  education,  even  of  the 
more  intelligent  classes  of  the  more  intelligent  na- 
tions of  the  earth,  is  what  it  is,  there  is  perhaps  a 
great  deal  of  excuse  for  any  government  that  prac- 
tises it  in  time  of  emergency. 

The  same  process  arises  of  course  when  the  Gov- 
ernment, instead  of  borrowing  from  banks  or  print- 
ing paper  on  its  own  account,  borrows  from  sub- 
scribers to  its  loans,  who  do  not  hand  it  over  saved 
money,  but  borrow  from  their  bankers  in  order  to 
produce  money  for  patriotic  purposes.  In  this  case, 
unless  the  borrowing  investor  pays  off  his  advance 
from  his  bank  at  least  as  fast  as  the  Government 
pays  the  money  out,  we  get  an  increase  in  currency, 
and  a  fresh  tendency  to  inflation.  The  Govern- 
ment's problem  at  all  times,  whatever  be  the  thing 
that  it  wants  to  pay  for,  is  to  make  or  induce  the 
citizens  to  hand  it  over  buying  power  which  other- 
wise they  would  have  spent  on  themselves,  or  have 
put  into  the  development  of  industry.  Any  process 
which,  instead  of  bringing  this  about,  merely  man- 
ufactures new  currency,  and  so  depreciates  the 
value  of  all  outstanding  currency,  is  a  fraud  and 
a  delusion  which  brings  its  punishment  with  it 
some  day. 


198        THE  BUSINESS  OF  FINANCE 

It  is  very  necessary  to  lay  stress  on  these  plati- 
tudes because  there  has  been,  ever  since  money 
was  invented,  a  tendency  to  believe  that  the  lot  of 
mankind  can  be  made  better,  and  that  wealth  can 
be  somehow  created,  by  a  mere  multiplication  of 
the  symbols  which  pass  current  and  are  taken  in 
exchange  of  wealth.  In  times  like  these,  when  there 
are  all  kinds  of  people  eager  to  find  panaceas  for 
all  kinds  of  human  ills,  the  crop  of  proposals  for 
multiplying  human  wealth  by  putting  into  circu- 
lation an  extra  number  of  pieces  of  paper,  is  ap- 
pallingly fruitful,  and  if  such  schemes  are  planted 
upon  the  public  by  politicians  who  have  not  the 
courage  to  do  their  financing  in  the  right  way 
there  is  great  danger  to  the  stability  of  the  world's 
financial  fabric. 

Finally,  to  round  off  the  subject  one  may  repeat 
a  few  more  platitudes,  as,  for  instance,  that  when  a 
Government  borrows  for  any  purpose  that  is  not 
going  to  increase  the  power  of  the  community  to 
produce  and  transport  goods,  it  is  making  a  wrong 
use  of  the  machinery  of  finance,  and  that  when  a 
Government  borrows  abroad  the  effect  upon  the 
national  welfare  is  clearly  worse  than  if  it  raised 
the  money  at  home.  If  it  borrows  abroad  and  puts 
the  money  to  good  economic  use  which  increases 
the  productive  power  of  the  country,  then  it  will 
have  available  the  necessary  supply  of  goods  and 
services  to  send  abroad  in  redemption  of  the  debt 
and  a  balance  over.  If  the  borrowing  process  does 
not  have  this  beneficial  effect,  the  goods  and  services 


FINANCE  AND  GOVERNMENT         199 

that  have  to  be  sent  abroad  will  be  a  direct  re- 
duction of  the  nation's  power  to  consume  them. 
If  the  Government  borrows  at  home,  and  makes 
a  bad  or  unproductive  use  of  the  money,  the  only 
result  is  that  there  is  a  distortion  of  the  distribu- 
tion of  the  national  wealth.  It  is  not  necessarily 
diminished  as  a  whole — though  it  is  clearly  not 
increased  as  it  would  have  been  if  the  money  had 
been  fruitfully  invested — but  those  who  have  lent 
the  money  which  has  been  put  to  a  bad  use  are 
thereby  given  a  hold,  until  the  debt  is  paid,  over  a 
certain  proportion  of  the  national  output,  and  if 
this  process  is  carried  too  far  there  will  be  evil 
political  and  social  results.  It  is  generally  as- 
sumed that  by  borrowing  a  Government  can  make 
posterity  pay  for  whatever,  by  war  or  other  enter- 
prise, has  to  be  financed.  Whatever  posterity  pays 
it  pays  to  itself.  We  cannot  by  any  ingenuity  here 
and  now  get  money,  still  less  goods  and  services, 
out  of  the  next  generation.  By  our  loans  and  other 
financial  arrangements  we  can  gravely  affect  the 
distribution  of  the  wealth  that  posterity  produces, 
but  we  cannot  get  hold  of  it  ourselves,  and  we  can- 
not diminish  it  except  in  so  far  as  we  leave  a  leg- 
acy of  social  and  political  trouble  which  may  dis- 
turb the  productive  effort  of  the  nation  in  the 
future. 

Summing  up  the  effort  made  in  this  book,  I  have 
tried  to  show  how  important  it  is  that  the  machin- 
ery of  finance  should  be  kept  clean,  and  handled 
by  men  with  clean  hands  and  minds,  filled  always 


200        THE  BUSINESS  OF  FINANCE 

with  the  wish  to  use  it  for  the  improvement  of  man's 
lot  and  the  expansion  of  his  power  over  the  forces 
of  Nature.  Many  difficulties  have  been  shown  to 
lie  in  the  way  of  the  fulfilment  of  the  ideal,  most 
of  which  are  seen  to  arise  out  of  the  ignorance  and 
greed  of  an  economically  uneducated  public,  which 
continually  invites  sharks  to  prey  on  it,  and  then 
blames  finance,  and  those  who  try  to  work  it  hon- 
estly, because  its  invitation  is  accepted. 


INDEX 


"Acceptance,**  60-61. 
"Accepting"  the  bill,  59. 
Advance  to  customers,  58. 
"Adverse    trade    balance,'*    of 

England,  141-142. 
Advertising,  costliness  of,  66. 
America,    trade    balance    of, 

142-145. 
Assets,  of  a  company,  99,  104- 

109. 
Auditors,  specimen  report  of, 

98-101. 
Austrian  State  Bank,  store  of 

claims  upon  London,  150-151. 

Balance  of  trade,  see  Trade 
balance. 

Balance  sheet,  56-57,  96-109. 

Bank  Act,  in  England,  28. 

Bank  deposits,  increase  in, 
38-40,  63. 

Bank  note,  history  of,  26; 
misuse  of,  27-28. 

Bank  of  England,  notes  of, 
28-29 ;  monopoly  of  joint- 
stock  banking,  31. 

Banking,  changed  status  of,  36. 

Banking  credit,  government 
use  of,  during  war,  44-45. 

Banks,  manufacturers  of  cur- 
rency, 40-41,  51 ;  influence 
on  production,  67-68;  and 
speculation,  68-69. 

Bill  brokers,  bank  loans  to,  58. 

Bill  of  exchange,  history,  25; 
operation  of,  58-59  ;  in  inter- 
national trade,  135-137. 

Booth,  Sir  Alfred,  on  increase 
of  food  prices,  78-79. 

Brokers,  bank  loans  to,  58,  62. 

Bullion  certificate,  28. 


Canada,  trade  balance  of,  142. 

Capital,  definition,  71-72;  re- 
lation to  finance,  72-73 ; 
value  of,  82. 

"Capital  and  liabilities,"  on 
balance  sheet,  98. 

Capitalists,  abuse  of  povrer, 
84-85 ;  service  rendered,  91. 

*'Cash  at  call  or  short  notice," 
58. 

Cheques,  importance  of,  21; 
history  of,  30;  advantages 
of,  32. 

Child  labor,  capitalists*  abuse 
of,  84-85. 

Coinage,  origin  of,  23-24. 

Collective  ownership  of  cap- 
ital, 89-91. 

Commissioners  for  Southwest- 
ern area,  England,  report 
on  food  prices,  78-79. 

Common  stock,  124. 

Company  capital,  development 
of,  93. 

Credit,  manufacture  of ,  55-56; 
operation  of,  57-69 ;  relation 
to  manufacture  of  currency, 
61-62 ;  distinguished  from 
capital,  70-71. 

Cumulative  rate  of  dividend, 
defined,  122. 

Currency,  definition,  20-21 ; 
history,  22-23 ;  manufacture, 
34-35 ;  effect  of  volume  cre- 
ated on  prices,  41,  43-44 ; 
suggested  reform  of,  52; 
schemes  for  increase  of,  64. 

Debenture  stocks,  97. 
"Debtor"  and  "Creditor"  col- 
umns, on  balance  sheet,  96. 


201 


202 


INDEX 


Demand,  relation  to  price,  43  ; 
regulation  of,  65-67. 

De-monetisation  of  gold,  sug- 
gested, 52-53. 

Depreciation,  deduction  for, 
104,  106,  107. 

Direct  taxation,  war  should 
be  financed  by,  77-78;  ad- 
vantages of,  181-182. 

Directors,  public's  reliance 
upon,  109,  110. 

Discount,  rate  of,  of  Bank  of 
England,  148-149. 

Distribution  of  wealth,  15-16. 

Economic  progress,  see  Prog- 
ress, economic. 

England,  government  control 
of  finance,  12-13,  118-119; 
Bank  Act,  28  ;  issue  of  notes, 
29-30 ;  industrial  unrest,  50 ; 
war  finance,  76 ;  companies' 
concealment  of  facts  on 
balance  sheet,  112:  control 
of  securities,  127-128 ;  trade 
balance,  141-142;  control  of 
Exchanges,  150 ;  interna- 
tional investments,  161-162; 
incomes  and  taxation  before 
the  war,  176-177;  rise  in 
prices,  195-196. 

Excess  profits  tax,  blamed  for 
vagueness  of  balance  sheets, 
112. 

Fiduciary  circulation,  28. 

Finance  bills,  misuse  of,  146. 

Floating  debt,  102. 

Food  prices,  report  on  in  Eng- 
land, 78-79. 

Food  taxation,  179-180. 

Foreign  exchange,  develop- 
ment of,  24. 

Founder's  shares,  124-125. 

France,  government  control  of 
securities,  127. 

Freehold  properties,  106. 

Gambling  in  investments,  74- 
75.   132. 


Germany,  war  finance,  76. 

Gold,  circulation  discontinued 
by  war,  33  ;  as  reserve,  34 ; 
eifect  on  bank  deposits,  39 ; 
in  "Quantity  theory,"  42; 
effect  of  increased  produc- 
tion of,  51-52  ;  world's  preju- 
dice for,  52-53 ;  suggested 
abolition  as  medium  of  ex- 
change, 152. 

Gold  exchange  standard,  150- 
151. 

Gold  point,  147-148. 

Goods,  equilibrium  between 
currency  and,  53-54. 

Goodwill,  105-106. 

Governments,  war's  influence 
on  their  control  of  private 
enterprise,  11-12;  note  issue 
in  present  war,  29 ;  regula- 
tion of  banking  by,  34-35; 
loans,  37 ;  control  of  inter- 
national finance,  152-153; 
control  of  exchange  after 
•war,  159;  borrowing  from 
bankers,  196;  borrowing 
abroad,  198-199. 

Graduated  tax,  182-187. 

Harvest,  effect  on  finance  of, 

143-145. 
Hill,    John,    on   trade   unions 

and  co-operation,  92. 

Imperial  Continental  Gas  Co., 
dividends  discontinued  by 
war,  156-157. 

Income  tax,  79,  183-190. 

Indemnities,  reliance  upon,  76. 

Indirect  taxation,  applied  to 
necessities,  87-88. 

Individualism,  in  business,  126. 

Industrial  unrest,  in  England, 
12-13,  50 ;  and  currency  cre- 
ation by  banks,  46;  quick- 
ened by  extravagance  of 
wealthy,  79. 

Industry,  relation  to  finance, 
5-6,  14. 


INDEX 


Inflation,  44-45,  46,  48,  79, 
191-192,  196. 

Inherited  wealth,   82-83,  185. 

International  bank  note,  sug- 
gested, 152. 

Inverse  graduation,  180. 

Invisible  exports,  138-139. 

Joint-stock  banking,  London, 

31. 
Joint-stoQk  companies,  reason 

for,  115. 

Laboring  classes,  advantage  of 
merging  into  capitalistic 
class,  92. 

Legal  tender,  20,  32. 

Liabilities,  the  two  forms  of, 
104. 

Lipton  Comi)any,  balance  sheet 
of,  96-109. 

Liquidation,  preference  hold- 
ers in  event  of,  122-123. 

Loans,  by^vernments  in  war, 
37;  of  banks,  57-58;  inter- 
national, 140. 

London,  monopoly  of  note 
issue  by  Bank  of  England 
in,  31. 

London  &  Westminster  Bank, 
31. 

Malthusian  doctrine,  88. 

Management  shares,  124-125. 

Marshall,  Professor,  on  in- 
come tax,  189. 

Metals,  precious,  advantage  as 
medium  of  exchange,  22-23. 

Mill,  John  Stuart,  on  demand 
and  prices,  43. 

Mining  shares,  gambling  pos- 
sibilities of,  113. 

Money,  see  Currency. 

"Money  market,"  defined,  21. 

Mortgage  bonds,  97. 

Necessities,  taxation  on,   179- 

180. 
Net  earnings,  of  a   company, 

103. 
"Not  negotiable,"  32. 


"Order,"  drawn  to,  32. 
Ordinary  stocks,  124. 
Over-issue  of  bank-notes,  27-28. 
Overproduction    of    currency, 

see  Inflation. 
Overproduction,  m.erchant*s 

fear  of,  65-67. 

Paper  money,  in  international 
trade,  134. 

Peel's  Act  of  1844,  28. 

Porder,  Richard,  sermon  of, 
against  bills  of  exchange, 
24-25. 

Posterity,  shifting  of  taxes 
on,  76-77,  199. 

Precious  metals,  see  Metals. 

Preference  shares,  123-124. 

Prices,  rise  in,  6,  43-46,  49-51, 
78-79;  in  England,  195-196; 
effected  by  volume  of  cur- 
rency created,  41,  45-46; 
effect  of  fall  in,  49;  effect 
on  wages,  50  ;  steadiness  the 
ideal  in,  51 ;  effected  by  out- 
put of  gold,  52. 

Private  enterprise,  war's  in- 
fluence on,  11-12. 

Production,  stimulated  by 
moderate  inflation,  48 ;  in- 
fluence of  banks  on,  67-68; 
maintenance  of,  72,  81. 

Profit  and  loss  account,  on 
balance  sheet,  100. 

Progress,  economic,  16-17,  83- 
84,  95,  110-111. 

Proportionate  taxation,  182- 
187. 

Prospectus,  regulation  of,  115- 
117 ;  what  it  should  contain, 
120. 

Public,  ignorance  of  finance 
of,  73-75,  94,  109-111,  113, 
117;  economic  education  of, 
64-65,   177-178. 

Quantity  theory,  41-47. 

Rate  of  discount,  of  Bank  of 
England,  148-149. 


204 


INDEX 


Rate  of  exchange,  143. 

Rentier  class,  49. 

Reserve  account,  of  a  com- 
pany, 102. 

Reserves,  of  banks,  35. 

Roman  Empire,  lack  of  pre- 
cious metals  in,  48. 

"Run,  on  bank,"  value  of  re- 
serve for,  35. 

Saving",  checked  by  small  re- 
turns, 49-50 ;  economic  value 
of,  70.71,  80-81,  92,  95. 

Saving's  banks,  in  connection 
with  commercial  companies, 
103. 

Seasonal  trade,  of  America, 
143-145. 

Securities,  forms  of,  120-123; 
denomination  of,  125;  g-ov- 
ernment  control  of  market- 
ing- of,  127-130. 

6ha»eholders*  money,  item  on 
balance  sheet,  104. 

"Silver  bullion,"  28. 

"Sixpenny  Bazaar,"  131. 

Smith,  Adam,  on  g-ovemment 
interference  vrith  industry, 
87  ;  on  taxation,  178. 

Socialism,  applied  to  finance, 
82,  89-91. 

Speculation,  and  banks,  69; 
versus  investment,  74-75, 
122,  167 ;  disadvantages  and 
benefit  from,  132. 

Spending,  versus  Investing; 
72,  81,  95. 

State  control  of  capital,  89-91. 

Stock  brokers,  bank  loans  to, 
58,  62. 

Stock  exchange,  resx)onsibility 
for  securities  offered,  129- 
130. 

Stocks-in-Trade,  107-108. 


Supply  and  demand,  effect  on 

securities,  122. 
Swindlers,  result  of  ignorance 

of  public,   73-74;   financiers 

not  responsible  for,  113-114  ; 

London's  freedom  results  5n, 

130. 

Thrift,  see  Saving. 

Ti^me  bargains,  131. 

Todd, Prof  essor,  quantity  theo- 
ry of,  41-42. 

Trade  balance,  of  England, 
141-142;  of  America,  142- 
145 ;  advantages  and  disad- 
vantages of,  151-152. 

Travelers,  production  of  in- 
visible export  by,  139-140. 

Treasury  notes,  in  England, 
29-30,   194-195. 

Trust  companies,  in  England, 
114. 

Turgot,  definition  of  capital 
by,  71. 

Utility,  economic  sense  of,  22. 

Visible  exports,  138. 

Wages,  effect  of  price  on,  50; 
Malthusian  theory  on,  88. 

War,  reduction  of  finance*s 
prestige  by,  5 ;  effect  on 
prices,  6,  43-44  ;  influence  on 
private  enterprise,  11-12 ; 
effect  on  English  banking, 
29,  33;  loans,  37;  effect  on 
"Quantity  theory,"  41-42 ; 
relation  to  inflation,  44  ;  bad 
finance  of,  75-80;  effect  on 
future  foreign  investment, 
154-161. 

Wealth,  definition  of,  71. 


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